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UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 


SCHOOL  OF  LAW 
LIBRARY 


TREASURY  DEPARTMENT 

UNITED  STATES   INTERNAL  REVENUE 


U-i.     lK-ferna(     R^-'^'^'^e  Se^ui^:^ 


m 


REGULATIONS  No.  41 


RELATIVE  TO  THE 


WAR  EXCESS  PROFITS  TAX 


IMFOSED  BY  THE 


WAR  REVENUE  ACT.  APPROVED  OCTOBER  3.  1917 


WASHINGTON 

GOVERNMEN  I  PRINTING  OFFICE 

1918 


4  WAR  EXCESS  PROFJTS  TAX.    - 

5  Art.  5.  Taxable  year. — Tlic  term  "taxable  year"  means  the 
12  months  ending  December  31  of  each  year,  except  in  the  case 
of  a  corporation  or  partnership  which  has  fixed  its  own  fiscal  year, 
in  which  case  it  moans  siicli  fiscal  year.  The  first  taxable  year 
is  the  year  ending  December  31,  1917,  except  that  in  the  case  of  a 
corporation  or  partnership  which  has  fixed  its  own  fiscal  j^ear,  the 
first  taxable  year  is  the  fiscal  year  ending  during  the  calendar  year 
1917.  (For  special  provisions  as  to  prorating  the  amiaunt  of  tax 
due  for  the  portion,  of  any  fiscal  year  ending  during  the  calendar  year 
1917,  see  articles  19  and  20.) 

6  Art.  6.  Prewar  period. — Tha  term  "prew^ar  period'*  means  the 
calendar  years  1911,  1912,  and  1913,  or  if  a  corporation  or  partner- 
ship was  not  in  existence  or  an  individual  w^as  not  engaged  in  the  trade 
or  business  during  the  whole  of  such  three  years,  then  a,s  many  of 
such  years  during  the  whole  of  which  the  corporation  or  ^^^artnership 
was  in  existence  or  the  individual  was  engaged  in  the  trade  or  busi- 
ness. 

7  Art.  7.  "Trade,"  "business,"  "trade  ar  business"  in  case  of  corpo- 
rations and  partnerships. — In  the  case  of  a  corporation  or  partnership 
all  iacome  from  whatever  source  derived  is  deemed,  to  be  received 
from  its  trade  or  business,  and  the  terms  "trade/'  "business,"  ajid 
"trade  or  business"  include  all  sources  of  iiLcome. 

8  Art.  8.  "Trade"  in  the  case  of  individuals. — In  the  case  of  an 
individual, 'th©  terms  "trade,"  "business,"  and  "trade  or  business" 
comprehend  aU  his  activities  for  gain,  profit,  or  livelihood,  entered 
into  with  sufficient  frequency,  or  occupying  such  portion  of  his 
time  or  attention  as  to  coiistitute  a  vocation,  including  occupa- 
tions and  professions.  ^Vllen  such  activities  constitute  a  vocation 
they  shall  be  construed  to  be  a  trade  or  business  w^hetber  continu- 
Qusiy  carried  on  dming  the  taxable  3'^ear  or  not,  and  all  tlie  income 
arising  therefrom  sh^dl  be  included  in  liis  return  for  excess-profits  tax. 

9  In  the  following  cases  the  gain  or  income  is  not  subject  to  excess- 
profits  taJx,  and  the  capital  from  whichsuch  gain  or  income  is  derived 
shall  not  be  included  in  "invested  capital" :  (a)  Gains  or  profits  from 
transactions  entered  into  for  profit,  but  which  are  isolated^  incidental^ 
or  so  infrequent  as  not  to  constitute  an  occupation,  and  (6)  the 
income  from  property  arising  merely  from  its  ownership,  ineluding 
interest^  rent,  and  similar  income  from  investments  excepifc  in  thoso 
cases  in  which  the  management  of  such  investments  really  consti- 
tutes a  trad©  or  business.; 

ly  Art.  9.  "Dividend." — The  term  "dividend"  has  the  same  meaning 
as  in  section  31  of  the  act  of  September  8,  1916,  as  amended  by  the 
act- of  October  3,  1917.     (See  Income  Tax  Regulations,  art.  106.) 


WAR  EXCESS  PEOFITS  TAX.  5 

CORPORATIONS,   PARTNERSHIPS,  AND    INDIVIDUALS    SUBJECT    TO 

THE  TAX. 

Art.  10.  Corporations. — Every  domestic  corporation  which  has  for    11 
the  taxable  year  a  net  income  of  So, 000  or  more  is,  unless  exempt 
under  article  13,  required  to  make  a  return  and  to  pay  the  tax,  if  any. 

Every  foreign  corporation  which  has  for  the  taxable  year  a  net    12 
income  of  $3,000  or  more  from  sources  within  the  United  States  is, 
unless  exempt  under  article  13,  required  to  make  a  return  and  to 
pay  the  tax,  if  any. 

Art.  11.  Partnerships. — Every  domestic  partnership  which  has  for    13 
the  taxable  year  a  net  income  of  $6,000  or  more  is,  unless  exempt 
under  article  13,  required  to  make  a  return  and  to  pay  the  tax,  if 
any. 

Every  foreign  partnership  which  has  for  the  taxable  year  a  net  in-    14 
come  of  S3, 000  or  more  from  sources  within  the  United  States  is, 
unless  exempt  under  article  13,  required   to  make  a  return  and   to 
pay  the  tax,  if  any. 

Art.   12.  Individuals. — Every  citizen  or  resident  of   the  United    15 
States  who  has  for  the  taxable  year  an  aggregate  net  income  in  excess 
of  $6,000  from  trades,  businesses,  occupations  or  professions  is,  un- 
less exempt  under  article  13,  required  to  make  a  return  and  to  pay 
the  tax,  if  any. 

Every  nom'esident  alien  individual  who  has  for  the  taxable  year  an   16 
aggregate  net  income  of   $3,000  or  more  from    trades,   businesses, 
occupations,  or  professions  carried  on  within  the  United  States  is, 
unless  exempt  under  article  13,  required  to  make  a  return  and  to 
pay  the  tax,  if  any. 

Art.  13.  Exemptions. — The  following  are  exempt  from  the  tax:  17 

(a)  Corporations  exempt  under  the  provisions  of  section   11   of    18 
Title  I  of  the  act  of  September  8,  1916,  from  the  tax  imposed  by  such 
title.      (See  Income  Tax  ReguLitions,  arts.  G7,  ff.) 

(b)  Partnerships  carrpng  on  or  doing  the  same  kind  of  business  or    19 
coming  within  the  same  description, 

{c)  In(Hviduals  to  the  extent  that  they  carry  on  or  do  the  same   20 
kind  of  business  or  come  within  the  same  description. 

RATES  AND  COMPUTATION  OF  TAX. 

Art.  14.  Classification  of  net  income. — For  the  purposes  of  the   21 
excess  profits  tax  net  income  which  is  subject  to  the  tax  shall  be 
divided  into  two  classes,  as  follows: 

A.  Net  income  which  is  derived  from  a  trade  or  bitsiness  having   22 
no  invested  capital,  or  not  more  than  a  nominal  capital,  incluchng 
in  the  case  of  an  individual  salaries,  wages,  fees,  or  other  compensa- 
tions; and 


6  WAR  EXCESS  PROFITS   TAX. 

13  B.  Net  income  which  is  derived  from  a  trade  or  business  having 
invested  capital. 

24  In  the  case  of  a  corporation  or  partnership,  all  the  trades  and  busi- 
nesses in  which  it  is  engaged  will  bo  treated  as  a  single  trade  or 
business  (as  provided  in  sec.  201),  and  its  entire  income  will  be  held 
to  be  of  the  same  class  as  the  income  from  its  principal  trade  or 
business. 

25  In  the  case  of  an  individual  the  net  income  subject  to  the  excess 
profits  tax  shall  be  classified  as  provided  in  this  article.  Net  in- 
come of  class  A  shall  be  taxed  as  provided  in  article  15,  and  net 
income  of  class  B  shall  be  taxed  as  provided  in  article  16. 

26  Art.  15.  Kate  of  tax  on  income  of  class  A. — The  tax  upon  net 
income  of  class  A  as  defined  in  article  14  shall  be  computed  at  the 
rate  of  8  per  cent  upon  the  amount  thereof  in  excess  of  $3,000  in  the 
case  of  a  domestic  corporation ;  upon  the  amovmt  thereof  iii  excess  of 
$6,000  in  the  case  of  a  domestic  partaersMp  or  of  a  citizen  or  resident 
of  the  United  States;  and  upon  the  whole  thereof  in  the  case  of  a 
foreign  corporation  or  partnership  or"of  a  nonresident  alien  individual. 

27  Art.  16.  Eate  of  tax  on  income  of  class  B. — ^The  tax  upon  net 
income  of  class  B  as  defined  in  article  14  shall,  except  as  otherwise 
provided  in  article  17,  be  computed  at  the  follov/ing  rates: 

20  per  cent  of  the  amount  of  the  net  income  in  excess  of  the 
deduction  (deteniiined  as  provided  in  articles  21,  23,  and  24)  and 
not  in  excess  of  15  per  cent  of  the  invested  capital  for  the  taxa- 
ble year; 

25  per  cent  of  the  amount  of  the  net  income  in  excess  of  15 
per  cent  and  not  in  excess  of  20  per  cent  of  such  capital; 

35  per  cent  of  the  amount  of  the  net  income  in  excess  of  20 
per  cent  and  not  in  excess  of  25  per  cent  of  such  capital; 

45  per  cent  of  the  amount  of  the  net  income  in  excess  of  25 
per  cent  and  not  in  excess  of  33  per  cent  of  such  capital; 

60  per  cent  of  the  amount  of  the  net  income  in  excess  of  33 
per  cent  of  such  capital. 

28  Illustrations. — (1)  A  corporation  has  a  capital  of  .SIOO.OOO,  prewar  earnings  of 

7  per  cent,  and  a  net  income  for  the  taxable  year  of  $75,000: 

The  deduction  allowed  will  be  7  per  cent  of  the  capital,  or  $7,000,  plus  $3,000  .specific 
deduction,  a  total  of  $10,000. 
The  amount  of  the  net  income  taxable  at  each  rate  will  be  as  follows: 

In  excess  of  the  deduction  and  not  in  excess  of  15  per  cent  of  the  capital  (rate, 

20  per  cent) $5,  000 

In  excess  of  15  per  cent  of  the  capital  and  not  in  excess  of  20  per  cent  thereof 

(rate,  25  per  cent) 5, 000 

In  excess  of  20  per  cent  of  the  capital  and  not  in  excess  of  25  per  cent  thereof 

(rate,  35  per  cent) 5, 000 

In  excess  of  25  per  cent  of  the  capital  anci  not  in  excess  of  33  per  cent  thereof 

(rate,  45  per  cent) 8,  000 

In  excess  of  33  per  cent  of  the  capital  (rate,  60  per  cent) 42, 000 


WAE   EXCESS   PROFITS   TAX.  7 

The  tax  would  then  be  computed  as  follows: 

20  per  cent  of  S5,000 $1,  000 

25  per  cent  of  $5,000 1,  250 

35  per  cent  of  $5.000 1,  750 

45  per  cent  of  $8,000 3,  GOO 

60  per  cent  of  §42,000 25.  200 

Total  tax 32,  800 

(2)  An  individual  or  partnership  has  a  capital  of  $100,000,  prewar  earnings  of  8  per    29 
cent,  and  a  net  income  for  the  taxable  year  of  §22,500. 

The  deduction  allowed  will  be  8  per  cent  of  the  capital,  or  $8,000,  plus  $6,000 
Bpecific  deduction,  a  tntal  of  $14,000. 

The  amount  of  the  net  income  taxable  at  each  rate  will  be  as  follows: 

In  excess  of  the  deduction  and  not  in  excess  of  15  per  cent  of  th(?rapital  (rate, 

20  per  cent) .  .  .  -. $1,  000 

In  excess  of,  J5  per  cent  of  the  capital  and  not  in  excess  of  20  per  cent  thereof 

(rate,  25  per  cent) 5,  000 

In  excess  of  20  per  cent  of  the  capital  and  not  in  excess  of  25  per  cent  thereof 

(rate,  35  per  cent) 2,  500 

The  tax  would  then  be  computed  as  follows: 

20  per  cent  of  $1 ,000 $200 

25  per  cent  of  $5.000 1,  250 

35  per  cent  of  $2,500 875 

Total  tax 2,  325 

Art.  17.  When  deduction  exceeds  15  per  cent  of  invested  capital. — -  30 
In  any  case  in  which  the  deduction  determined  as  provided  in  articles 
21,  23,  and  24  is  greater  than  15  per  cent  of  the  invested  capital 
and  therefore  can  not  be  fully  allowed  under  the  first  rate  or  bracket 
of  article  16,  then  any  remaining  portion  of  the  deduction  wiU  be 
allowed  under  the  second  bracket,  and  continued  if  necessary  into  the 
succeeding  bracket  or  brackets  until  the  entire  amount  of  the  deduc- 
tion is  allowed. 


Illustrations. — (1)  A  corporation  has  a  capita!  of  $9,000;  prewar  earnings  of  9    31 
per  cent;  and  a  net  income  for  the  taxable  year  of  $10,000. 

The  deduction  allowed  will  be  9  per  cent  of  the  capital,  or  |810,  plus  $3,000  specific 
deduction,  a  total  of  $3,810. 

The  amount  of  the  net  income  in  each  bracket  will  be  as  follows: 

15  per  cent  of  the  capital $1,  350 

In  excess  of  15  per  cent  of  the  capital  and  not  in  excess  of  20  per  cent  thereof.  450 

In  excess  of  20  per  cent  of  the  capital  and  not  in  excess  of  25  per  cent  thereof.  450 

In  excess  of  25  per  cent  of  tlie  capital  and  not  in  excess  of  33  per  cent  thereof.  720 

In  excess  of  33  per  cent  of  the  capital 7, 030 

It  is  evident" that  the  total  deduction  of  $3,810  is  greater  than  15  per  cent  of  the 
capital  and  so  is  not  fully  absorbed  by  the  amount  of  net  income  not  in  excess  of  15 
per  cent  of  the  capital.  In  such  case,  applying  article  17,  the  total  deduction  of 
$3,810  will  be  distriljuted  as  follows: 

$1,350  in  the  first  bracket,  leaving  nothing  to  be  taxed  at  the  20  per  cent  rate. 

$450  in  the  second  bracket,  leaving  nothing  to  be  taxed  at  the  25  per  cent  rate. 

$450  in  the  third  bracket,  leaving  nothing  to  be  taxed  at  the  35  per  cent  rate. 

$720  in  the  fourth  bracket,  leaving  nothing  to  be  taxed  at  the  45  per  cent  rate. 


8  WAR  EXCESS  PKOFITS  TAX. 

There  still  remains  $840  of  the  deduction  to  be  allowed  in  the  fifth  bracket  against 
the  $7,030  of  income  which  would  otherwise  be  taxable  under  that  bracket.  There 
would  then  be  $6,190  of  net  income  left  to  be  taxed  at  the  60  per  cent  rate  under 
the  fifth  bracket.  Hence,  the  total  excess-profits  tax  in  this  case  would  be"  $3,714. 
S2  [2)  An  individual  or  partnership  has  a  capital  of  $40,000,  prewar  earnings  of  9  per 
cent,  and  a  net  income  for  the  taxable  year  of  $12,000. 

The  deduction  allowed  will  be  9  per  cent  of  the  capital,  or  $3,000,  plus  $6,000  specific 
deduction,  a  total  of  $9,600. 

The  amount  of  the  net  income  in  each  bracket  will  be  as  follows: 

15  per  cent  of  the  capital $6, 000 

In  excess  of  15  per  cent  of  the  capital  and  not  in  excess  of  20  per  cent  thereof. . .  2,  000 
In  excess  of  20  per  cent  of  the  capital  and  not  in  excess  of  25  per  cent  thereof. . .  2, 000 
In  excess  of  25  per  cent  of  the  cajDital  and  not  in  excess  of  33  per  cent  thereof. . .     2.  000 

It  is  e^^dent  that  the  total  deduction  of  $9,000  is  greater  than  15  per  cent  of  the  capital 
and  so  is  not  fully  absorbed  by  the  amount  of  net  income  not  in  excess  of  15  per  cent 
of  the  capital.  In  such  case,  applying  article  17,  the  total  deduction  of  $9,000  will 
be  distributed  as  follows: 

$6,000  in  the  first  bracket,  lea\dng  nothing  to  be  taxed  at  the  20  per  cent  rate. 
$2,000  in  the  second  bracket,  leaving  nothing  to  be  taxed  at  the  25por  cent  rate. 
$1,600,  the  balance  of  the  deduction,  to  be  allowed  against  the  $2,000  of  income 
in  the  third  bracket. 
There  would  then  be  $400  of  income  left  in  the  third  bracket  to  be  taxed  at  the  35 
per  cent  rate,  and  $2,000  in  the  fourth  bracket  to  be  taxed  at  the  45  per  cent  rate. 
Hence,  the  total  excess-profits  tax  in  this  case  vvould  be  $1,040. 

83  Art.  18.  Constructive  Capital  for  Application  of  Sates. — Where  the 
deduction  allowed  to  a  taxpayer  is  dcterminod  under  article  24,  the 
invested  capital  for  the  purpose  of  applying  the  rates  of  taxation 
under  article  16  shall  be  deemed  to  be  an  amount  v/liich  bears  the 
same  ratio  to  the  net  income  of  the  trade  or  business  for  the  taxable 
year  which  the  average  invested  capital  for  the  corresponthng  calendar 
year  of  representative  corporations,  partnerships,  and  individuals 
engaged  in  a  lik-e  or  similar  trade  or  business  bears  to  their  average 
net  income. 

34  The  Commissioner  of  Internal  Revenue  in  determining  for  any 
calendar  year  the  ratio  wltich  the  average  invested  capital  of  rep- 
resentative corporations,  partnerships,  and  individuals  engaged  in 
any  particular  trade  or  business  bears  to  their  average  net  income, 
mil  include  the  invested  capital  and  net  income  of  representative 
corporations  and  partnerships  for  fiscal  years  ending  during  such  cal- 
endar j^ear. 

35  For  the  purpose  of  applying  this  article  in  the  case  of  a  corpora- 
tion or  partnersliip  which  has  fixed  its  own  fiscal  year,  the  ratio 
determined  for  the  calendar  year  ending  during  such  fiscal  year  shall 
be  used. 

36  Art.  19.  Computation  of  tax  for  fiscal  year,  part  of  which  falls 
within  calendar  year  1916.— If  a  corporation  or  partnership  prior  to 
March  1,  1918,  makes  a  return  for  a  fiscal  year,  part  of  which  falls 
within  the  calendar  year  1916,  the  tax  for  the  first  taxable  year  shall 


WAR   EXCESS   PEOFITS    TAX.  9 

be  that  proportion  of  the  tax  computed  upon  the  net  income  for 
such  fiscal  year  which  the  number  of  months  from  January  1,  1917, 
to  the  end  of  such  fiscal  year  bears  to  the  entire  number  of  months 
in  such  fiscal  year. 

Art.  20.  Computation  of  tax  for  period  of  less  than  12  months. —  37 
If  a  corporation  or  partnership  at  any  time,  either  because  it  has 
just  designated  a  fiscal  year  as  provided  in  sections  8  or  13  of  the 
act  of  September  8,  1916  (see  Income  Tax  Regulations,  arts.  31 
and  211),  or  for  any  other  reason,  makes  a  return  for  a  period  of  less 
than  12  months,  the  deduction  will  be  an  amomit  which  bears  the 
same  ratio  to  the  deduction  allowable  for  a  full  year  as  the  number 
of  months  in  such  period  bears  to  12  months. 

COMPUTATION  OF  THE  DEDUCTION. 

Art.  21.    "Jjade    or    business    having    invested    capital. — The  de-   38 
duction  used  in  computing  the  rates  of  tax  under  article  16  shall, 
except  in  cases  coming  within  the  conditions  specified  in  articles  23 
and  24,  be  as  follows: 

(a)  In  the  case  of  a  domestic  corporation  the  sum  of  (1)  an  amount   39 
ecpial  to  the  same  percentage  of  the  invested  capital  for  the  taxable 
year  which  the  average  amount  of  the  annual  net  income  of  the  trade 

or  business  during  the  prewar  period  was  of  the  invested  capital  for 
the  prewai*  period  (except  that  7  per  cent  shall  be  used  if  such  per- 
centage was  less  than  7  per  cent,  and  9  per  cent  shall  be  used  if  such 
percentage  was  more  than  9  per  cent,  and  8  per  cent  shall  be  used 
if  the  corporation  was  not  in  existence  during  the  whole  of  at  least 
one  calendar  year  during  the  prewar  period),  and  (2)  $3,000. 

(b)  In  the  case  of  a  domestic  partnership  or  of  a  citizen  or  resident  40 
of  the  United  States,  the  sum  of  (1)  an  amount  equal  to  the  same 
percentage  of  the  invested  capital  for  the  taxable  year  which  the 
average  amount  of  the  anniTal  net  income  of  the  trade  or  business 
during  the  prewar  period  was  of  the  invested  capital  for  the  prewar 
period  (except  that  7  per  cent  shall  bo  used  if  such  percentage  was 
less  than  7  per  cent,  and  9  per  cent  shall  be  used  if  sucli  percentage 
was  more  than  9  per  cent,  and  8  per  cent  shah  be  used  if  the  partner- 
ship was  not  in  existence  or  the  individual  was  not  engaged  in  the 
trade  or  business  during  the  whole  of  at  least  one  calendar  year 
during  the  prewar  period),  and  (2)  S6,000. 

(c)  In  the  case  of  a  foreign  corpora.tion  oi"  partnership  or  of  a  non-   41 
resident  alien  individual,  an  amount  equal  to  the  same  percentage  of 
the  invested  ca])ital  for  the  taxable  year  which  the  average  amount 

of  the  annual  net  income  of  the  trade  or  business  during  the  prewar 
period  was  of  the  invested  ca])ital  for  the  prewar  period  (except  that 
7  per  cent  sliaU  be  used  if  such  percentage  was  less  than  7  per  cent, 
and  9  per  cent  shall  bo  used  if  such  percentage  was  more  than  9  per 
33761°— 18 2 


10  WAE  EXCESS  PEOFITS  TAX. 

cent;  and  8  per  cent  shall  be  used  if  the  corporation  or  partnership 
was  not  in  existence  or  the  individual  was  not  engaged  in  the  trad6 
or  business  during  the  whole  of  at  least  one  calendar  year  during  the 
prewar  period) . 

42  Art.  22.  Trade  or  business  reorganized  on  or  after  January  2, 
1913. — If  a  trade  or  business  carried  on  by  a  corporation,  partnership 
or  individual  was  formally  organized  or  reorganized  on  or  after  Janu- 
ary 2,  1913,  but  is  substantially  a  continuation  of  a  trade  or  business 
carried  on  prior  to  that  date,  then  the  corporation  or  partnership  shall 
be  deemed  to  have  been  in  existence,  or  the  individual  shall  be  deemed 
to  have  been  engaged  in  the  trade  or  business,  prior  to  that  date,  and 
for  the  purpose  of  computing  the  deduction  the  net  income  and 
invested  capital  of  the  predecessor  shall  be  deemed  to  have  been  the 
net  income  and  invested  capital  of  the  present  owner  for  the  prewar 
period. 

43  Art.  23.  When  income  for  prewar  period  can  not  be  satisfactorily 
determined,  or  when  net  income  was  low  during  prewar  period,  or 
when  there  was  no  net  income  during  prewar  period. — In  the  follow- 
ing cases  the  deduction  shall  be  determined  as  provided  in  this  article; 

44  (a)  If  the  Secretary  of  the  Treasury  is  unable  satisfactorily  to  de- 
termine the  average  amount  of  annual  net  income  of. the  trade  or 
business  for  the  prewar  period ; 

45  (h)  If  the  Secretary  of  the  Treasury  upon  complaint  finds  that  dur- 
ing the  prewar  period  the  percentage  of  the  net  income  to  the  invested 
capital  of  the  taxpayer  was  lower  by  1  per  cent  or  more  than  the 
percentage  of  the  net  income  to  the  invested  capital  of  representative 
corporations,  partnerships  or  individuals  engaged  in  a  like  or  similar 
trade  or  business  during  the  same  period. 

46  (c)  If,  in  the  case  only  of  a  domestic  corporation  or  partnership 
which  was  in  existence  during  the  prewar  period,  or  of  a  citizen  or 
resident  of  the  United  States  who  was  engaged  in  the  trade  or  busi- 
ness during  the  prewar  period,  the  Secretary  of  the  Treasury  upon 
complaint  finds  that  during  the  prewar  period  there  was  no  net  in- 
come from  the  trade  or  business. 

In  such  cases  the  deduction  shall  be — 

47  (1)  An  amount  equal  to  the  same  percentage  of  the  invested  capital 
for  the  taxable  year  which  the  average  deduction  (determined  in  the 
same  manner  as  provided  in  article  21,  without  including  the  $3,000 
or  S6,000  therein  referred  to)  for  such  year  of  representative  corpora- 
tions, partnerships,  or  individuals  engaged  in  a  like  or  similar  trade 
or  business,  is  of  their  average  invested  capital  for  such  year,  plus 

48  (2)  In  the  case  of  a  domestic  corporation,  $3,000,  and  in  the  case 
of  a  domestic  partnership  or  a  citizen  or  resident  of  the  United  States, 
S6,000. 


WAR  EXCESS  PROFITS  TAX.  11 

In  cases  arising  under  subdivision  (a)  or  (c)  of  this  article  the  tax   49 
shall  be  assessed  in  the  first  instance  upon  the  basis  of  a  deduction 
computed  by  the  use   of  7  per  cent.     In  cases  arising  under  sub- 
division (b)  the  tax  shall  be  assessed  in  the  first  instance  upon  the 
basis  of  a  deduction  determined  as  provided  in  article  21. 

In  any  case  under  this  article  a  taxpayer  claiming  the  benefit  of  60 
this  provision  shall  at  the  time  of  making  the  return  file  a  claim  for 
abatement  (Form  47)  of  the  amount  by  which  the  tax  so  assessed 
exceeds  a  tax  computed  upon  the  basis  of  the  deduction  deter- 
pained  as  provided  in  this  article.  In  cases  coming  within  the  pro- 
visions of  this  article  payment  of  that  portion  of  the  tax  covered 
by  the  claim  for  abatement  will  not  be  required  until  the  claim  is 
decided.  If,  however,  in  the  judgment  of  the  Commissioner  of 
Internal  Revenue  the  interests  of  the  United  States  would  be  jeop- 
ardized thereby,  the  right  is  reserved  to  require  the  claimant  to 
give  a  bond  of  such  amount  and  with  such  sureties  as  the  commis- 
sioner thinks  wise  to  safeguard  such  interests.  The  bond  shall  be 
conditioned  for  the  payment  of  any  tax  found  to  be  due  with  in- 
terest thereon,  and  if  a  bond  satisfactory  to  the  commissioner  is 
not  given  within  such  time  as  he  prescribes,  the  fuU  amount  of  the 
tax  assessed  will  become  immediately  due  and  the  amount  over- 
paid, if  any,  will  upon  final  decision  of  the  application,  be  refunded 
as  a  tax  erroneously  or  illegally  collected. 

Art.  24.  When  invested  capital   can   not   be   satisfactorily  deter-    51 
mined. — If  the  Secretary  of  the  Treasury  is  unable  satisfactorily  to 
determine  the  invested  capital,  the  deduction  shall  be  the  sum  of — 

(1)  An  amount  equal  to  the  same  proportion  of  the  net  income  of  52 
the  trade  or  business  for  the  taxable  vear  as  the  average  deduction 
(determined  in  the  same  manner  as  provided  in  article  21  without 
including  the  .$3,000  or  S6,000  therein  referred  to)  for  the  corre- 
sponding calendar  year,  of  representative  corporations,  partner- 
ships, and  individuals  engaged  in  a  like  or  similar  trade  or  business, 

is  of  their  average  net  income,  plus 

(2)  In  the  case  of  a  domestic  corporation  $3,000,  and  in  the  case  of   53 
a  domestic  partnership  or  a  citizen  or  resident  of  the  United  States, 
S6,000. 

The  Commissioner  of  Internal  Revenue  in  determining  for  any  cal-  54 
endar  year  the  proportion  which  the  average  deduction  of  repre- 
sentative corporations,  partnerships,  and  individuals  engaged  in  any 
particular  trade  or  business  is  of  their  average  net  income,  will  in- 
clude the  deductions  and  net  income  of  representative  corporations 
and  partnerships  for  fiscal  years  ending  during  such  calendar  year. 

For  the  purpose  of  applying  this  article  in  the  case  of  a  corporation    55 
or  partnership  which  has  fixed  its  own  fiscal  year,  the  proportion 
determined  for  the  calendar  year  ending  during  such  fiscal  year  shall 
be  used. 


12  WAR  EXCESS  PROFITS  TAX. 

56  In  every  case  of  a  trade  or  business  having  invested  capital  a  return 

shall  be  made  in  the  first  instance  in  accordance  with  article  21  or  23, 

but  the  taxpayer  may  submit  therewith  a  statement  of  reasons  why 

in  his  opinion  the  tax  should  be  assessed  in  accordance  with  this 

article. 

NET  INCOME— GENERAL  PROVISIONS. 

57  Art.  25.  Exemptions. — The  following  classes  of  income  are  exempt 
from  the  tax: 

68  (a)  Income  exempt  from  taxation  under  section  4  of  the  act  of 
September  8,  1916,  as  amended.  (See  Income  Tax  Regulations, 
art.  5.) 

59  (b)  Income  derived  from  the  business  of  life,  health,  and  accident 
insurance  combined  in  one  policy  issued  on  a  weekly  premium  pay- 
ment plan. 

60  (c)  Compensation  or  fees  received  by  officers  and  em])loyees  under 
the  United  States  or  any  State,  Territorj^,  or  the  District  of  Columbia 
for  their  services  as  such. 

61  Art.  26.  Net  income  of  foreign  corporations,  pa.rtnerships,  and  non- 
resident alien  individuals. — In  the  case  of  a  foreign  corporation  or 
partnership  or  a  nonresident  alien  individual  the  net  income  shall  be 
the  net  income  from  sources  within  the  United  States. 

62  Art.  27.  Dividends  received  from  a  foreign  corporation  which  is 
subject  to  Federal  income  tax. — In  the  case  of  income  derived  by  a 
corporation  or  partnership  from  dividends  upon  the  stock  of  a  foreign 
corporation,  part  of  whose  net  income  is  subject  to  the  income  tax, 
there  shall  be  deducted  only  that  proportion  of  the  dividends  received 
upon  such  stock  which  the  net  income  of  such  foreign  corporation 
from  sources  within  the  United  States  is  of  its  entire  net  income, 

63  Where  dividends  upon  the  stock  of  a  foreign  corporation  are 
received  by  an  individual,  as  a  part  of  his  income  from  trade  or 
business,  there  shall  be  included  in  the  net  income  tliat  proportion 
of  the  dividends  received  upon  such  stock  which  the  net  income  of 
sucii  corporation  from  sources  outside  the  United  States  is  of  its 
entire  net  income. 

NET  INCOME— CORPORATIONS. 

64  Art.  28.  Taxable  year. — The  net  income  of  a  corporation  for  the 
taxable  year  shall  be  determined  by  adding  (1)  the  amount  of  net 
income  ascertained  and  returned  for  income  tax  purposes  for  such 
taxable  year  as  provided  in  Title  I  of  the  act  of  September  8,  1916, 
as  amended,  and  (2)  the  amount,  if  any,  received  as  interest  on 
bonds  or  other  obligations  of  the  United  States,  issued  after  Septem- 
ber 24,  1917  (other  than  the  interest  received  on  an  amount  of  such 
bonds  or  obligations  the  aggregate  principal  of  which  does  not 
exceed  S5,000),  and  deducting  from  the  total  so  obtained  the  amounts 


WAR   EXCESS   PROFITS   TAX.  13 

received  during  the  taxable  year  as  dividends  upon  the  stock  or  from 
the  net  earnings  of  other  corporations,  joint-stock  companies  or 
associations,  or  insurance  companies,  subject  to  the  income  tax 
imposed  by  Title  I  of  such  act  of  Septembci-  S,  1916,  as  amended, 
except  as  otherwise  provided  in  article  27. 

Art.  29.  Prewar  period. — The  net  income  of  a  corporation  for  the    65 
prev\^ar  period  shall  be  computed  as  follows: 

(a)  For  the  calendar  3'ear  1911  by  adding  (1)  the  amount  of  net    66 
income  shown  in  item  9  of  the  return  made  under  section  38  of  the 
act  of  August  o,  1909,  for  the  calendar  year  1911,  and  (2)  the  amount 
of  taxes  paid  to  the  United  States  within  the  calendar  year  1911 
under  section  38  of  such  act; 

(6)   For  the  calendar  year  1912  by  adding  (1)  the  amount  of  net    67 
income  shown  in  item  9  of  the  return  made  under  section  38  of  the 
act  of  August  5,  1909,  for  the  calendar  year  1912,  and  (2)  the  amount 
of  taxes  paid  to  the  United  States  within  the  calendar  year  1912 
under  section  38  of  such  act;  and 

(f)  For  the  calendar  year  1913  by  adding  (1)  the  amount  of  the  68 
entire  net  income  shown  in  item  8  of  the  return  made  under  Section 
II  of  the  act  of  October  3,  1913,  for  the  calendar  year  1913,  and 
(2)  the  amount  of  taxes  paid  within  the  calendar  year  1913  under 
section  38  of  the  act  of  August  5,  1909,  and  Section  II  or  TV  of  the 
act  of  October  3,  1913,  and  deducting  from  the  total  so  obtained 
the  amounts  received  during  the  calendar  year  1913  ag  dividends 
upon  the  stock  or  from  the  net  earnings  of  other  corporations,  joint- 
stock  companies  or  associations,  or  insurance  companies,  subject  to 
the  income  tax  imposed  by  Section  II  of  the  act  of  October  3,  1913. 

NET  INCOME— PARTNERSHIPS. 

Art.  30.  Taxable  year. — The  net  income  of  a  partnership  for  the  69 
taxable  year  shall  be  determined  by  adding  the  amount  of  its 
entire  net  income  (or  in  the  case  of  a  foreign  partnership,  its  entire 
net  income  from  sources  within  the  United  States)  ascertained  upon 
the  same  basis  and  in  the  same  manner  as  provided  with  respect  to 
individuals  for  income-tax  purposes  by  Title  I  of  the  act  of  Septem- 
ber 8,  1916,  as  amended  (see  Income  Tax  Regulations,  art.  30),  in- 
cluding the  amounts,  if  any,  received  during  the  3^ear  as  interest  on 
bonds  or  other  obligations  of  the  United  States  issued  after  Septem- 
ber 24,  1917  (other  than  the  interest  on  an 'amount  of  such  bonds  or 
obligations,  the  aggregate  principal  of  which  does  not  exceed  $5,000), 
and  dechicting  therefrom — - 

(1)  The  amounts  received  during  the  taxable  year  as  dividends    70 
upcHi   the  stock  or  from   the  net  earnings   of   corporations,  joint- 
stock  companies  or  associations,  or  insurance  com]iainos,  subject  to 
the  income  tax  imposed  by  Title  I  of  the  act  of  September  8,  1916, 
as  amended,  except  as  otherwise  provided  in  article  27 ;  and 


14  WAR  EXCESS  PROFITS  TAX. 

71  (2)  The  deductions,  if  any,  for  salaries  or  interest  allowed  by 
articles  32  and  33,  if  such  deductions  have  not  already  been  made. 

72  Art.  31.  Prewar  period. — The  net  income  of  a  partnership  for  each 
of  the  calendar  years  1911,  1912,  and  1913  shall  bo  determined  in  the 
same  manner  as  the  net  income  for  the  taxable  year,  except  that 
dividends  upon  the  stock  or  from  the  net  earnings  of  corporations, 
joint-stock  companies  or  associations,  or  insurance  companies,  subject 
to  the  tax  imposed  by  section  38  of  the  act  of  August  5,  1909,  or  by 
Section  II  of  the  act  of  October  3,  1913,  shall  be  deducted.  (See 
art.  30.) 

73  Art.  32.  Deductions  allowed  for  salaries  paid  to  partners. — In  com- 
puting net  income  for  purposes  of  the  excess  profits  tax  a  partner- 
ship will  be  allowed  to  deduct  as  an  expense  reasonable  salaries  or 
compensation  paid  to  individual  partners  for  personal  services  actu- 
aU}"  rendered  during  the  taxable  year,  if  the  payments  are  made  in 
accordance  with  prior  agreements  and  are  properly  recorded  on  the 
books  of  the  partnership.  In  no  case  shall  the  salaries  or  comi^ensa- 
tion  so  deducted  be  in  excess  of  the  salaries  or  compensation  cus- 
tomarily paid  for  similar  services  under  like  responsibilities  by  cor- 
porations engaged  in  like  or  similar  trades  or  businesses, 

74  With  respect  to  any  period  prior  to  March  1,  1918,  regardless  of 
whether  a  previous  agreement  has  been  made  as  to  salaries  or  com- 
pensation, a  similar  deduction  will  be  allowed  for  services  actually 
rendered. 

75  In  the  case  of  a  foreign  partnershi])  the  deduction  shall  be  limited 
to  those  portions  of  salaries  or  compensation  which  are  jjaid  for 
services  rendered  with  respect  to  trade  or  business  carried  on  in  the 
United  States. 

76  A  partner  in  his  individual  capacity  is,  however,  subject  to  the 
excess  profits  tax,  if  any,  at  the  8  per  cent  rate  under  article  15  with 
respect  to  any  salary  or  compensation  from  the  partnership  for 
personal  services  (including  any  amounts  allowed  to  the  partnership 
as  a  deduction  on  his  account  for  the  period  prior  to  March  1,  1918). 

77  Art.  33.  Deductions  allowed  for  interest  on  bona  fide  loans  by 
partners. — In  computing  net  income  for  purposes  of  the  excess 
profits  tax  a  partnership  will  be  allowed  to  deduct  amounts  paid 
during  the  year  to  an  individual  partner  as  interest  upon  any  bona 
fide  loan,  but  no  deduction  for  so-called  interest  upon  capital  will  be 
allowed. 

78  Art.  34.  If  deduction  is  made  under  article  32  or  33,  corre- 
sponding deduction  must  also  be  made  for  prewar  period. — If,  in  com- 
puting net  income  for  purposes  of  the  excess  profits  tax,  a  partnership 
makes  a  deduction  as  allowed  by  article  32  for  salaries  paid  to  part- 
ners during  the  taxable  year,  it  must  also  in  computing  net  income 
for  the  prewar  period  make  a  corresponding  deduction;  and  if  it 


WAR    EXCESS   PROFITS    TAX.  '     15 

makes  sucli  a  deduction  as  allowed  by  article  33  for  interest  paid  to 
partners,  it  must  also  in  computing  net  income  for  the  prewar  period 
make  a  corresponding  deduction  for  an}-  such  interest  actually  paid 
during  that  period. 

NET  INCOME— INDIVIDUALS. 

Art.  35.  Determination  of  net  income  where  there  is  no  invested  79 
capital  or  only  nominal  capital. — The  net  income  which  is  derived 
from  a  trade  or  business  having  no  invested  capital  or  not  more  than 
a  nominal  capital,  including  salaries,  wages,  fees  or  other  compensa- 
tions (constituting  net  income  of  class  A  as  defined  in  art.  14)  shall 
be  determined  for  the  taxable  year  by  adding  the  total  net  income 
from  all  such  sources  (or  in  the  case  of  a  nonresident  alien  individual 
the  total  net  income  from  all  such  sources  within  the  United  States) 
as  reported  for  income  tax  purposes  for  the  same  year. 

Art.  36.  Determination  of  net  income  for  taxable  year  when  there  80 
is  invested  capital.— The  net  income  which  is  derived  from  a  trade  or 
business  having  invested  capital  (constituting  net  income  of  class  B, 
as  defined  in  art.  14)  shall  be  determined  for  the  taxable  year  by 
adding  the  total  net  income  from  such  sources  (or  in  the  case  of  a 
nonresident  alien  individual  the  total  net  income  from  such  sources 
within  the  United  States)  as  reported  for  income  tax  purposes  for 
the  same  year  and  deducting  therefrom  the  deduction,  if  any,  for 
salary  allowed  by  article  39,  if  such  deduction  has  not  already  been 
made. 

There  shall  be  excluded  the  amounts  received  during  the  year  upon    81 
the  stock  or  from  the  net  earnings  of  corporations,  joint-stock  com- 
panies or  associations,  or  insurance  companies,  subject  to  the  income 
tax  imposed  by  Title  I  of  the  act  of  September  S,  1916,  as  amended. 

In  the  case,  however,  of  an  individual  dealing  in  securities  or  other-  82 
wise  using  securities  in  trade  or  business  there  shall  be  included  (1) 
the  amount,  if  any,  received  as  interest  on  bonds  or  obligations  of 
the  United  States,  issued  after  September  24,  1917  (otlicr  than  the 
interest  received  on  an  amount  of  such  bonds  or  obligations  the 
aggregate  principal  of  which  docs  not  exceed  $5,000),  and  (2)  such 
proportion  of  dividends  received  upon  the  stock  of  foreign  corpora- 
tions as  is  required  to  be  included  by  article  27. 

Illustration. — An  individual  owns  a  farm  representing  an  invested  capital  of  83 
$25,000,  a  country  store  with  an  invested  capital  of  ^G,000,  and  a  flour  mill  with  an 
invested  capital  of  $10,000.  His  net  income  from  the  farm  is  $4,000,  from  the  store 
$3,000,  and  from  the  mill  $3,000.  Thus  \m  total  net  income  of  class  B  is  $10,000. 
Ilis  total  invested  capital  ia  $41,000.  Assuming  that  his  deduction  is  at  the  rate 
of  8  per  cent,  his  total  deduction  will  be  $3,280  plus  $6,000,  or  $9,280,  to  be  applied 
against  his  net  income  of  $10,000  in  computing  the  tax  at  the  graduated  rates  under 
articles  16  and  17. 

The  same  individual  allows  himself  a  salary  of  $1,000  for  working  the  farm  and 
$900  for  running  the  store,  draws  a  salary  of  $1,200  as  president  of  the  local  bank, 


16  WAR  EXCESS  PROFITS  TAX. 

and  receives  $250  in  compensation  for  personal  services  of  various  kinds,  sucli  as 
road  work,  helping  neighbors  in  lArvest,  etc.  He  also  receives  $300  in  dividends 
on  an  investment  in  certain  stocks  and  $100  as  supervisor's  fees.  The  last  item — that 
is,  supervisor's  fees — is  exempt  under  the  law  (sec.  201,  subdivision  a).  The  $300  in 
dividends  is  not  taxable,  inasmuch  as  it  is  derived  from  a  mere  investment  not  con- 
nected with  his  trade  or  business.  Ilis  net  income  of  class  A  will  therefore  consist 
of  his  salaries  and  his  compensation  for  personal  services,  a  total  of  $3,350.  Since  he 
is  entitled  to  a  deduction  of  $6,000  as  to  this  class  of  income,  he  will  have  no  tax 
to  pay  at  the  8  per  cent  rate  under  article  15. 

84  Art.  37.  Deduction  of  contributions  for  religious,  charitable,  etc., 
purposes. — Contributions  or  gifts  for  religious,  charitable,  etc., 
purposes  allowed  as  a  deduction  for  purposes  of  tlie  income  tax  under 
paragraph  "Ninth"  of  subdivision  (a)  of  section  5  of  the  act  of 
September  8,  1916,  as  amended,  may,  subject  to  the  limitations 
therein  contained,  be  deducted  in  computing  the  net  income  of  the 
trade  or  business  for  purposes  of  the  excess  profits  tax  only  when  it 
is  shown  to  the  satisfaction  of  the  Conmiissioner  of  Internal  Revenue 
that  such  contributions  or  gifts  are  made  by  the  trade  or  business 
and  not  by  the  individual  in  his  personal  capacity. 

85  Art.  38.  Determination  of  net  income  for  the  prewar  period  where 
there  is  invested  capital. — The  net  income  which  is  derived  from  a 
trade  or  business  having  invested  cajntal  (constituting  net  income  of 
class  B  as  defined  in  article  14)  shall  be  determined  for  each  of  the 
calendar  years  1911.  1912,  and  1913  upon  the  same  basis  and  in  the 
same  manner  as  provided  in  article  36. 

86  Art.  39.  Deduction  allowed  for  salary  to  himself. — An  individual 
carrying  on  a  trade  or  business  having  an  invested  capital  may  in 
computing  the  net  income  of  the  trade  or  business  for  purposes  of 
the  excess  profits  tax  deduct  a  reasonable  amount  designated  by 
him  as  salary  or  compensation  for  personal  service  actually  rendered 
by  him  in  the  conduct  of  such  trade  or  business.  In  no  case  shall 
the  am.omit  so  designated  be  in  excess  of  the  salaries  or  compensa- 
tion customarily  paid  for  similar  service  under  Uke  responsibilities 
by  corporations  or  partnerships  engaged  in  Hke  or  similar  trades  or 
businesses. 

87  In  the  case  of  a  nonresident  alien  individual,  the  amount  deducted 
shall  be  limited  to  that  portion  of  the  salary  or  compensation  wiiich 
is  for  service  rendered  with  respect  to  trade  or  business  carried  on 
in  the  United  States. 

88  The  amount  so  designated  shall,  however,  be  included  in  com- 
puting his  net  income  of  class  A  under  article  35;  and  the  balance  of 
the  income  from  his  trade  or  business  shall  be  included  in  computing 
his  net  income  of  class  B  under  article  36. 

89  Illustration. — An  indi\ddual  owns  and  runs  a  newspaper  having  an  invested 
capital  of  $50,000.  The  net  income  from  the  newspaper,  without  making  any  allow- 
ance for  the  salary  of  the  owner,  is  $20,000,  and,  as  income  of  class  B,  is  subject  to  the 


WAR    EXCESS   PROFITS   TAX.  17 

graduated  rates  prescribed  in  article  16.  His  deduction,  as  provided  for  in  sub- 
division (6)  of  article  21,  would  be  $4,500  (9  per  cent  of  his  capital)  plus  $6,000,  a  total 
of  $10,500.  If,  however,  he  allows  himself  a  salary  of  $3,000,  the  net  income  from  the 
newspaper  will  be  $17,000,  and  the  deduction  of  $10,500  will  be  applied  against  that 
amount. 

His  salary  of  $3,000  must  be  included  in  his  return  as  income  of  class  A,  which  is 
Bubject  to  the  8  per  cent  rate  under  article  15.  If  it  constitutes  his  only  income  of 
that  class  he  will  pay  no  tax  thereon,  inasmuch  as  it  is  less  than  the  deduction  of 
$6,000  to  which  he  is  entitled  as  to  that  class  of  income.  But  if,  for  example,  he  re- 
ceives in  addition  a  salary  of  $4,000  as  president  of  the  local  bank,  his  total  net  income 
of  class  A  will  be  $7,000,  and  he  will  be  required  to  pay  a  tax  of  8  per  cent  on  $1,000 
thereof,  or  $80. 

Art.  40.  If  deduction  is  made  under  article  39  corresponding  deduc- 
tion must  also  be  made  for  prewar  period. — If,  in  computing  net  income 
for  purposes  of  the  excess  profits  tax,  an  individual  deducts  a  reason- 
able amount  designated  as  salary  or  compensation  for  personal  serv- 
ices rendered  by  liimself,  as  allowed  by  article  39,  he  must  also  in 
computing  net  income  for  the  prewar  period,  make  a  corresponding 
deduction. 

Art.  41.  Individual  member  of  partnership. — Inasmuch  as  a  partner 
in  his  individual  capacity  is  not  considered  to  be  engaged  in  trade  or 
business  with  respect  to  his  share  in  the  profits  of  the  partnership, 
he  is  not  subject  to  excess  profits  tax  thereon.  Consequently,  in 
computing  his  net  income  for  purposes  of  the  excess  profits  tax  he 
need  not  include  his  share  of  the  partnership  profits. 

He  shall,  how^CA^er,  in  computing  his  net  income  of  class  A  under 
article  35,  include  any  salary  or  compensation  from  the  partnership 
for  personal  services  (including  any  amount  allowed  to  the  partner- 
ship as  a  deduction  on  his  account  for  the  period  prior  to  March  1, 
1918,  in  accordance  with  article  32). 

INVESTED  CAPITAL— GENERAL  PROVISIONS. 

Art.  42.  Allowance  for  depletion,  depreciation,  and  obsolescence 
in  computation  of  invested  capital. — The  term  "invested  capital"  as 
used  in  the  excess  profits  tax  law  means  the  invested  capital  of  the 
present  owner.  The  basis,  or  starting  point,  in  the  computation  of 
invested  capital  is  found  in  the  amount  of  cash  and  other  property 
paid  in,  the  original  values  of  such  other  property  being  determined 
in  accordance  with  the  rules  laid  down  in  these  regulations.  But 
the  computation  docs  not  stop  with  such  original  entries  or  amounts; 
it  must  take  properly  into  account  the  surplus  and  undivided  profits. 
In  the  computation  of  surplus  and  undivided  profits,  however,  full 
recognition  must  first  be  given  to  expenses  incurred  and  losses  sus- 
tained from  the  original  organization  of  the  business  concern  down 
to  the  taxable  year,  including  among  such  expenses  and  losses  a 
reasonable  allowance  for  depletion,  depreciation,  or  obsokscence  of 

33761°— 18 3 


18  WAK   EXCESS  PROFITS  TA.X. 

property  originally  acquired  for  cash  or  for  stock  or  shares  or  in  any 
other  manner.  If  value  appreciation  of  a  kind  not  subject  to  mcome 
tax  (other  than  that  allowed  under  article  55)  has  been  taken  up  in 
the  accounts,  a  deduction  must  be  made  in  respect  of  such  apprecia- 
tion so  taken  up.  In  the  computation  of  the  invested  capital  for  any 
year  full  effect  must  also  be  given  to  any  liquidation  of  the  original 
capital. 

94  Art.  43.  How  to  ascertain  average  invested  capital  for  the  year, 
averaged  monthly. — The  invested  capital  for  any  prewar  or  taxable 
year  (or  where  the  tax  is  computed  upon  the  basis  of  a  period  less 
than  a  year,  for  such  period)  is  the  average  invested  capital  for  the 
year  or  period  averaged  monthly,  accordmg  to  the  following  rules: 

95  (a)  Add  the  capital  for  each  of  the  several  months  durmg  wliich 
no  change  occurs,  and  the  average  capital  (ascertamed  as  provided 
in  subdivision  (b)  of  this  article)  for  each  month  in  which  a  change 
occurs  and  divide  the  total  by  the  number  of  months  in  the  year  or 
period. 

66  (6)  To  ascertam  the  capital  for  any  month  in  which  a  change 
occurs  multiply  the  capital  as  of  the  first  day  of  the  month  by  the 
nimiber  of  days  it  remains  constant  and  the  capital  after  each  change 
by  the  number  of  days  (including  the  day  on  which  the  change 
occurs)  during  wliich  it  remains  constant,  add  the  products,  and  di- 
vide the  sum  by  the  number  of  days  in  the  month. 

87  Art.  44.  Items  not  allowed  to  be  included  in  invested  capital. — 
The  second  paragraph  of  section  207  of  the  excess  profits  law 
specifies  certain  items  which  may  not  be  included  in  invested  capital, 
namely: 

98  (a)  Stocks,  bonds  (other  than  obhgations  of  the  United  States),  or 
other  assets,  the  income  from  which  is  not  subject  to  the  excess 
profits  tax;  and 

99  (b)  Money  or  other  property  borrowed. 

100  The  term  "mone}^  or  other  property  borrowed"  as  used  in  section 
207  and  these  regulations  includes  not  only  cash  or  other  borrowed 
property  which  can  be  identified  as  such,  but  current  liabilities  and 
temporary  indebtedness  of  all  kinds,  and  any  permanent  indebted- 
ness upon  wliich  the  taxpayer  is  entitled  to  an  interest  deduction  in 
computing  net  income.  A  corporation  which  under  the  income-tax 
law  is  allowed  to  deduct  only  a  part  of  the  entire  interest  paid  upon 
its  indebtedness,  may  include  in  its  invested  capital  such  a  proportion 
of  its  permanent  indebtedness  as  the  amount  of  interest  upon  such 
indebtedness  wliich  the  corporation  is  not  allowed  to  deduct  is  of  the 
total  amount  of  interest  paid  upon  such  indebtedness  during  the 
taxable  year. 

101  Art.  45.  When  income  from  tax-free  securities  consists  partly  of 
trading  profits  and   partly   of    interest,    dividends,    etc. — Whenever 


WAR   EXCESS   PROFITS   TAX.  19 

income  consists  partly  of  gains  or  profits  subject  to  the  excess  profits 
tax  arising  from  trading  in  stocks,  bonds,  etc.,  the  dividends  or  inter- 
est on  which  are  not  subject  to  such  tax,  and  partly  of  such  dividends 
or  interest,  then,  subject  to  the  hmitations  as  to  borrowed  money, 
there  shall  be  included  in  the  invested  capital  an  amount  which  bears 
the  same  ratio  to  the  total  amount  invested  in  such  stocks  or  bonds 
as  the  amount  of  such  gains  or  profits  bears  to  the  total  amount  of 
such  income. 

Aet.  46.  Treatment  of  stock  of  foreign  corporations  when  held  by  102 
domestic  corporations  or  partnerships  or  by  citizens  or  residents  of  the 
United  States. — In  the  case  of  domestic  corporations  or  partnerships 
and  of  citizens  or  residents  of  the  United  States  holding  stock  in  a 
foreign  corporation  part  of  whose  net  income  is  subject  to  the  income 
tax,  there  shall  be  included  in  invested  capital  such  proportion  of 
the  value  of  the  stock  in  such  foreign  corporation  as  the  net  income 
of  such  foreign  corporation  from  sources  outside  the  United  States 
is  of  its  entire  net  income. 

Art.  47.  Construction  of  terms  "tangible  property"  and  "intangible  103 
property." — The  term  "other  intangible  property"  as  used  in  section 
207  will  be  construed  to  mean  property  of  a  character  similar  to 
good  will,  trade-marks,  and  the  other  specific  kinds  of  property 
enumerated  in  the  same  clause.  With  respect  to  property  not  clearly 
of  such  a  character,  rulings  will  be  issued  as  occasion  may  demand  to 
indicate  whether  it  shall  be  regarded  as  tangible  or  intangible. 

The  foUowmg  classes  of  property,  when  paid  in  for  stock  or  shares  104 
in  a  corporation  or  partnership,  will  be  regarded  as  tangible  property 
so  paid  in: 

(a)  Stocks. 

(b)  Bonds. 

(c)  Bills  and  accounts  receivable. 

(d)  Notes  and  other  evidences  of  indebtedness. 

(e)  Leaseholds. 

But  when  a  corporation  pays  for  intangible  property  by  the 
issuance  of  its  own  stock  or  bonds,  this  will  not  be  regarded  as  being 
a  payment  bona  fide  made  in  cash  or  tangible  property  within  the 
meaning  of  section  207. 

Art.  48.  Invested  capital  of  foreign  corporations  or  partnerships  105 
or  nonresident  alien  individuals. — When  used  with  refereiu'o  to  a 
foreign  corporation  or  partnership  or  a  nonresident  alien  individual, 
the  term  ''invested  capital''  means  tHat  proportion  of  the  entire 
invested  capital  as  defined  and  limited  by  these  regulations  which  the 
net  income  from  sources  within  the  United  States  is  of  the  entire  net 
income. 

Art.  49.  Reorganization  on  or  after  January  2,  1913.— A  trade  or  106 
business  earned  on  by  a  corporation,  partnership,  or  individual,  which 


20  WAE  EXCESS  PROFITS  TAX. 

has  been  formally  organized  or  reorganized  on  or  after  January  2, 
1913,  but  which  is  substantially  a  continuation  of  a  trade  or  business 
carried  on  prior  to  that  date,  shall,  for  the  purposes  of  the  excess 
profits  tax,  be  deemed  to  have  been  in  existence  prior  to  that  date 
and  the  invested  capital  of  its  predecessor  prior  to  that  date  shall 
be  deemed  to  have  been  its  invested  capital.  This  article  relates  to 
the  prewar  period  and  does  not  ai^ply  to  the  invested  capital  for  tho 
taxable  j^ear. 

107  iVPvT.  50.  Reorganization  after  March  3,  1917. — In  case  of  the 
reorganization,  consolidation,  or  chiinge  of  owners*hip  of  a  trade  or 
business  after  March  3,  1917,  if  an  interest  or  control  in  such  trade 
or  business  of  50  per  cent  or  more  remains  in  control  of  the  same 
persons,  corporations,  associations,  partnerships,  or  any  of  them, 
then  in  ascertaining  the  invested  capital  of  the  trade  or  business  no 
asset  transferred  or  received  from  the  prior  trade  or  business  shall 
be  allowed  a  greater  value  than  would  have  been  allowed  under 
these  regulations  in  comj^uting  the  invested  capital  of  such  prior 
trade  or  business  if  such  asset  had  not  been  so  transferred  or  received, 
unless  such  asset  was  paid  for  specifically  as  such,  in  cash  or  tangible 
property,  and  then  not  to  exceed  the  actual  cash  or  actual  cash  value 
of  the  tangible  property  paid  therefor  at  the  time  of  such  pajrment. 

108  Art.  51.  Invested  capital  for  prewar  period. — Tlie  invested  capital 
for  the  prewar  period  shall,  in  general,  be  determinetl  in  the  same 
manner  as  for  the  taxable  yetir,  except  that  the  valuation  as  of 
January  1,  1914,  shall  not  apply  to  tangible  property  paid  in  for 
stock  or  shares. 

i09  Art.  52.  Scope  of  section  210. — Section  210  provides  for  excep- 
tional cases  in  which  the  invested  capital  can  not  be  satisfactorily 
determined.  In  such  cases  the  taxpayer  may  submit  to  the  Com- 
missioner of  Internal  Revenue  evidence  in  support  of  a  clauu  for 
assessment  under  the  provisions  of  section  210.  (See  articles  18  and  24.) 
Such  exceptional  cases  may  consist,  among  otliers,  of  the  following: 

110  (1)  Where,  through  defective  accounting  or  the  lack  of  adequate 
data,  it  is  impossible  accurately  to  compute  invested  capital. 

111  (2)  Where  upon  apphcation  by  a  foreign  taxpayer  the  Secretary 
of  the  Treasury  finds  that  the  expense  of  securmg  the  data  necessary 
for  the  computation  of  the  invested  capital  would  be  unreasonable 
in  view  of  the  amount  of  tax  involved,  or  that  it  is  impracticable  to 
determine  either  the  "entire  invested  capital"  or  the  "entire  net 
income." 

112  (3)  Long-established  business  concerns  which  by  reason  of  ultra- 
conservative  accounting  or  the  form  and  manner  of  their  oi*ganiza- 
tion  would,  through  the  operation  of  section  207,  be  placed  at  a 
serious  disadvantage  in  competing  with  representative  concerns  in  a 
hke  or  similar  trade  or  business. 


WAR   EXCESS  PROFITS   TAX.  21 

(4)  Where  the  mvested   capital  is  seriously  disproportionate   to  113 
the  taxable  income.     Such  cases  may  arise  through: 

(«)  The  realization  in  one  year  of  the  earnings  of  capital  unpro- 114 
ductively  invested  through  a  period  of  years  or  of  the  fruits  of 
activities  antedating  the  taxable  year;  or, 

(&)  Inability    to    recognize    or   properly    allow   for    amortization,  lift 
obsolescence,  or  exceptional  depreciation  due  to  the  present  war, 
or  to  the  necessity  in  connection  with  the  present  war  of  providing 
plant  which  will  not  be  wanted  for  the  purposes  of  the  trade  or 
business  after  the  termination  of  the  war. 

INVESTED  CAPITAL-CORPORATIONS  AND  PARTNERSHIPS. 

Art.  53.  Rule  for  computing  invested  capital. — In  computing  in- 116 
vested  capital,  every  corporation  or  partnership  paying  taxes  at  the 
graduated  rates  prescribed  in  section  201  (see  art.  16),  shall  add 
together  its  paid  in  capital  and  its  paid  in  or  earned  surplus  and  un- 
divided profits  (under  whatever  name  the  same  may  bo  called)  as 
shown  by  its  books  at  the  beginning  of  the  taxable  year.  The  total 
thus  obtained  shall  be  adjusted  for  any  asset  or  item  which  it  covers 
that  is  not  carried  on  the  books  at  the  valuation  prescribed  by  law 
or  by  these  regulations.  Wlien  necessary,  adjustment  (addition  or 
subtraction)  shall  be  made  in  respect  of  the  following: 

ADJUSTMENTS. 

1.  Stock  or  shares  issued  in  the  purchase  of  intangible  property  117 
prior  to  March  3,  1917,  which  can  not  be  included  in  an  amount  ex- 
ceeding (a)  20  per  cent  of  the  par  value  of  the  total  stock  or  shares 
outstanding  on  that  date,  (b)  the  actual  value  of  such  intangible 
property  at  the  date  acquired,  or  (c)  the  par  value  of  the  stock  or 
shares  issued  in  payment  therefor,  whichever  is  the  lowest.  (See 
arts.  57  and  58.) 

2.  Stock  or  shares  issued  for  a  mixed  aggregate  of  tangible  prop- 118 
erty,   patents   and   cop3'rights,    and   good   wiU   or   other  intangible 
property.     (See  art.  59.) 

3.  Stock  or  shares  issued  for  patents  and  copyrights,  valued  at  (a)  119 
their  actual  cash  value  at  the  time  of  payment,  or  (6)  the  par  value 

of  the  stock  or  shares   issued    therefor,  whichever  is  lower.      (See 
art.  56.) 

4.  Stock  or  shares  issued  for  tangible  property  prior  to  January  1, 120 
1914,  valued  at  (a)  the  actual  cash  value  of  such  property  on  Jan- 
uary 1,  1914,  or  (b)  the  par  value  of  the  stock,  whichever  is  lower. 
(See  art.  55.) 

5.  Stock  originally  issued  for  property  and  subsequently  returned  121 
to  the  corporation  as  a  gift,  etc,      (See  art.  54.)' 

6.  Add  any  proportion  of  its  permanent  indebtedness  which  may  122 
be  included  under  article  44. 


22  WAR  EXCESS  PROFITS  TAX. 

123  •/.  Add  value  of  tangible  property  pai4  in  for  stock  or  shares  in 
excess  of  tlic  par  value  of  such  shares,  when  authorized  by  article  63. 

124  8.  Add  amounts  expended  in  the  past  for  (a)  the  acquisition  of 
tangible  property  or  (&)  specifically  for  good  will  and  other  similar 
intangible  property,  when  authorized  by  article  64. 

125  9.  For  the  valuation  of  assets  acquired  in  reorganizations,  etc., 
(a)  effected  after  March  3,  1917,  see  article  50;  (&)  as  to  the  prewar 
period,  see  articles  49  and  51. 

126  10.  Deduct  amounts  representing  appreciation  excluded  by  arti- 
cle 42. 

127  11.  Make  any  additional  deductions  required  by  reason  of  insuffi- 
cient allowances  in  the  accounts  of  the  taxpayer  for  depletion, 
depreciation,  and  obsolescence.     (See  art.  42.) 

128  Whenever  any  corrections  are  made  in  respect  of  the  capital  stock 
and  sm*plus,  corresponding  corrections  must  be  made  in  the  re- 
spective asset  items  in  the  balance  sheet  of  the  taxpayer. 

129  After  making  any  adjustments  required  under  paragraphs  1  to  11 
above,  the  adjusted  total  of  the  capital  and  surplus  account  will 
represent  the  invested  capital  at  the  beginning  of  the  taxable  year, 
except  that  in  any  case  where  the  admissible  assets  (and  these 
include  all  assets  when  valued  in  accordance  with  these  regulations, 
except  stocks,  bonds — other  than  obligations  of  the  United  States — 
the  income  of  which  is  not  subject  to  excess-profits  tax)  are  less 
than  the  amount  of  such  adjusted  total,  then  the  invested  capital 
must  be  further  reduced  to  an  amoimt  equal  to  the  sum  of  the  ad- 
missible assets.  Tax-free  securities  and  stock  in  foreign  corporations 
may  be  included  as  admissible  assets  to  the  extent  authorized  in  arti- 
cles 45  and  46. 

130  If  there  has  been  any  change  made  during  the  taxable  year  in 
the  amount  of  the  invested  capital,  the  monthly  average  shall  be 
taken  (see  art.  43),  but  in  no  case  may  the  invested  capital  include 
any  surplus  or  undivided  profits  earned  during  the  taxable  year. 

131  With  respect  to  the  taxable  year  1917,  every  such  corporation 
and  partnership  will  be  required  to  submit  a  balance  sheet  as  at 
the  first  day  of  the  taxable  year  and  also  a  balance  sheet  as  at  the 
close  of  the  taxable  year,  Tliereafter  every  such  corporation  and 
partnership  will  be  required  to  submit  a  balance  sheet  as  at  the 
close  of  each  taxable  year.  Balance  sheets  should  be  made  in  accord- 
ance with  the  books  of  the  taxpayer  and  changes  in  respect  of  any  items 
therein  made  pursuant  to  these  regulations  should  be  explained  in  a 
separate  statement  attached  to  the  balance  sheet  to  which  it  relates. 

132  Art.  54.  Stock  returned  to  corporation. — -For  the  purpose  of  com- 
puting invested  capital,  in  cases  where  the  stock  of  a  corporation  is 
issued  or  exchanged  for  property  (tangible  or  intangible),  the  follow- 
ing rule  will  apply: 


WAR   EXCESS   PROFITS   TAX,  23 

When  any  of  such  stock  is  returned  to  the  corporation  as  a  gift  v>r  133 
for  a  consideration  substantially  less  than  its  par  value,  the  stock  so 
returned  shall  not  be  treated  as  a  part  of  the  stock  issued  or  exchanged 
for  such  property.  The  proceeds  derived  in  cash  or  its  equivalent 
from  the  resale  of  the  stock  so  returned  shall,  however,  be  included  in 
the  invested  capital  if  retained  and  employed  in  the  business. 

Art.  55.  Valuation  of  tangible  property  paid  in  for  stock  or  134 
shares. — Tangible  property  paid  in  for  stock  or  shares  prior  to  January 
1,  1914,  must  be  valued  at  either  (a)  the  actual  cash  value  of  such 
property  on  January  1,  1914,  or  (h)  the  par  value  of  the  stock  or 
shares  specifically  issued  therefor,  whichever  is  lower.  This  is  one 
of  the  few  cases  in  which  the  law  permits  allowance  to  be  made  for 
appreciation,  and  here  no  appreciation  can  be  recognized  unless  the 
original  stock  or  shares  were  specifically  issued  in  exchange  for  such 
tangible  property. 

Tangible  property  paid  in  for  stock  or  shares  on  or  after  January  1, 135 
1914,  will  be  taken  at  the  actual  cash  value  of  such  property  at  the 
time  of  payment,  irrespective  of  the  par  value  of  the  stock  or  shares. 

Art.  56.  Patents  and  copyrights. — Patents  and  copyrights  paid  in  136 
for  stock  or  shares  must  be  valued  at  either  (a)  the  actual  cash  value 
at  the  time  of  payment  or  (b)  the  par  value  of  the  stock  or  shares 
issued  therefor,  whichever  is  lower. 

Art.  57.  Valuation  of  intangible  property. — If  good  will,  trade-  137 
marks,  trade  brands,  franchises  of  a  corporation  or  partnership,  or 
other  intangible  property  has  been  purchased  with  stock  or  shares 
issued  prior  to  March  3,  1917,  the  amount  that  may  be  included  in 
invested  capital  must  not  exceed  (a)  20  per  cent  of  the  par  value  of 
the  total  stock  or  shares  outstanding  on  that  date,  nor  (h)  the  actual 
value  of  the  asset  at  the  date  acquired,  nor  (c)  the  par  value  of  the 
stock  issued  in  payment  for  the  asset. 

Art.  58.  Application  of  20  per  cent  limitation  upon  intangible  138 
property. — The  20  per  cent  limitation  upon  intangible  property 
purchased  prior  to  March  3,  1917,  for  or  with  stock  or  shares  of  the 
corporation  or  partnership,  applies  not  to  each  item  or  class  of  in- 
tangible property  separately,  but  to  the  aggregate  amount  of  all 
such  property  so  purchased.  Such  intangible  property  may  be  in- 
cluded in  the  invested  capital  only  up  to  an  amount  not  exceeding 
20  per  cent  of  the  total  stock  or  shares  of  the  corporation  or  partner- 
ship on  March  3,  1917,  even  though  the  aggregate  amount  of  such 
intangible  property  be  greater  in  value  than  such  20  per  cent  of  the 
par  value  of  the  total  stock  or  shares. 

Intangible  property  bona  fide  purchased  prior  to  March  3,  1917,  139 
with  stock  having  no  par  value  may  be  included  in  invested  capital 
at  a  value  not  exceeding  the  actual  cash  value  of  such  intangible 
property  at  the  time  of  the  purchase  and  in  an  amount  not  exceed- 


24  WAR  EXCESS  PROFITS  TAX. 

ing  20  per  cent  of  tho  total  shares  of  stock  outstanding  on  March  3, 
1917,  measured  by  their  value  as  at  the  date  or  dates  of  issue. 
140  Art.  59.  Rules  to  govern  cases  where  shares  or  securities  are  issned 
for  mixed  aggregate  of  tangible  and  intangible  property. — Where 
stock  or  shares  (or  stock  or  shares  and  bonds  or  other  obligations) 
have,  prioi  to  March  3,  1917,  been  issued  for  a  mixed  aggregate  of — 

(a)  Tangible  property, 

(&)  Patents  and  copyrights,  and 

(c)  Good  will  or  other  intangible  property, 
the  following  rales  will  govern : 
,141      (1)  Id  the  absence  of  satisfactory  evidence  to  the  contrary,  it  will 
be  presumed  in  tlie  case  of  a  corporation,  that  its  stock  was  issued 
for  the  followmg  purposes  in  the  order  named: 

(a)  Good  v'lII  or  other  intangible  property, 

(6)  Patent-^  and  copyrights,  and 

(c)  Tangible  property. 

142  (2)  Upon  the  production  by  the  taxpayer  of  evidence  satisfactory 
to  the  Commissioner  of  Internal  Revenue  as  to  the  actual  values  at 
the  date  of  acquisition  of  (a)  the  tangible  property  and  (&)  the 
patents  and  copyrights,  the  sum  of  these  two  items  may  be  applied 
against  the  total  par  value  of  the  securities  issned  and  the  remainder 

•  will  then  be  deemed    to  represent  the  par  value  of  the  securities 
issued  for  the  good  will  or  other  intangible  property. 

143  (3)  Cases  where  mixed  aggregates  of  tangible  and  intangible 
property  have  been  paid  m  for  stock  and  bonds  shall,  if  the  Secretary 
of  the  Treasui*}'  is  unable  to  determine  satisfactorily  the  respective 
values  of  the  several  classes  of  property  at  the  time  of  payment, 
be  treated  as  coming  under  articles  18  and  24  and  the  tax  shall  be 
assessed  accordingly, 

144  Art.  60.  Valuation  of  intangible  assets  purchased. — Good  wall  and 
other  similar  intangible  assets  purchased  with  cash  or  tangible 
property  must  be  taken  at  a  value  not  in  excess  of  the  cash  or 
actual  cash  value  of  the  tangible  property  specifically  paid  therefor. 

145  Art.  61.  Surplus  or  undivided  profits  earned  during  any  jesi.T  ex- 
cluded in  computing  invested  capital  for  such  year. — Profits  earned 
during  any  taxable  year  or  prewar  year  shall  not  be  included  in  the 
computation  of  the  invested  capital  for  such  year,  even  though  set 
up  as  "surpliLs"  upon  the  books  or  distributed  in  the  form  of  stock 
dividends. 

146  Art.  62.  Scope  of  phrase  "surplus  and  undivided  profits." — Clause 
(3)  of  subdivision  (a)  of  section  207  authorizes  the  inclusion  in  in- 
vested capital  of  earned  surplus  and  undivided  profits  used  or  em- 
ployed in  the  business.  Inasmuch  as  section  201  provides  that  all 
the  income  of  a  corporation  or  partnership  shall  be  deemed  to  be 
received  from  its  trade  or  business,  all  the  surplus  and  undivided 


WAR  EXCESS  PllOFlTS  TAX.  25 

profits  of  a  corporation  or  partnership  (exclusive  of  undivided  profits 
ea'-ned  during  the  year),  from  wiiatever  source  derived,  will,  unless 
invested  in  stocks,  bonds  (other  than  obligations  of  the  United 
States),  or  otiier  assets,  the  income  from  which  is  not  subject  to  the 
excess  profits  tax,  be  deemed  to  be  used  or  employed  in  the  business 
and  may  be  included  in  the  invested  capital. 

Art.  63.  When  tangible  property  may  be  included  in  surplus. — 147 
Where  it  can  be  shown  by  evidence  satisfactory  to  the  Commissioner 
of  Internal  Revenue  that  tangible  property  has  been  conveyed  to  a 
corporation  or  partnership  by  gift  or  at  a  value,  accurately  ascer- 
tainable or  definitely  known  as  at  the  date  of  conveyance,  clearly  and 
substantially  in  excess  of  the  cash  or  the  par  value  of  the  stock  or 
shares  paid  therefor,  then  the  amount  of  the  excess  shall  be  deemed 
to  be  paid  in  surplus.  The  adopted  value  shall  not  cover  mineral 
deposits  or  other  properties  discovered  or  developed  after  the  date 
of  conveyance,  but  shall  be  confined  to  the  value  accurately  ascer- 
tainable or  definitely  known  at  that  time. 

Evidence  tending  to  support  a  claim  for  a  paid-in  surplus  under  148 
these  circumstances  must  be  as  of  the  date  of  conveyance,  and  may 
consist,  among  other  things,  of  (1)  an  appraisal  of  the  property  by 
disinterested  authorities,  (2)  the  assessed  value  in  the  case  of  real 
estate,  and  (3)  the  market  price  in  excess  of  the  par  value  of  the 
stock  or  siiares. 

Art.  64.  Reconstruction  of  surplus  and  undivided  profits  accounts.  -- 149 
Where  through  failure  to  provide  for  depletion,  depreciation,  obso- 
lescence, or  other  expenses  or  losses,  or  where  for  any  other  cause  or 
reason  the  books  of  account  of  the  taxpayer  do  not  show  the  true 
paid-in  or  earned  surplus  and  undivided  profit'^,  hi  the  computa- 
tion of  invested  capital  such  adjustments  shall  be  made  as  are 
necessary  to  arrive  at  a  statement  of  the  correct  amount. 

Where  a  taxpayer  claims  additions  to  the  capital  account,  the  150 
books  of  account  will  be  presumed  to  show  tlic  true  facts  and  the 
burden  of  proof  will  rest  upon  the  taxpayer.     Such  additions  will  be 
accepted  only  to  the  extent  and  under  the  conditions  stated  below: 

(1)  Amounts  which  have  been  expended  in  the  past  for  the  acqui-161 
sition  of  plant,  equipment,  tools,  patterns,  furniture,  fixtures,  or  like 
tangible  property,  having  a  useful  life  extending  substantially  beyond 
the  year  in  which  the  expenditure  was  made,  and  which  have  been 
charged  as  current  expense,  may  (less  propcf  reduction  for  depreciation 
or  obsolescence)  be  added  to  the  surplus  accountin  computing  invested 
capital  when  such  assets  are  still  owned  and  in  active  use  by  the 
taxpayer  during  the  taxable  year.  Special  tools,  patterns,  and 
similar  assets  shall  not  be  assigned  any  value  if  their  cost  has  been 
recovered  through  having  been  included  in  the  price  of  goods.  If 
their  cost  has  iiot  be(Oi  so  recovered  and  they  are  held  for  only 
33781^—18 4 


26  WAE  EXCESS  PEOFITS  TAX. 

occasional  use,  they  shall  not  be  assigned  a  value  in  excess  of  the 
fair  vahie  hased  ivpon  the  earnings  actually  arising  from  their  cur- 
rent use.  Ass'is  of  this  kind  not  in  current  use  shall  not  be  valued 
at  more  tlian  their  jiominal  or  scrap  value. 
162  (2)  xVmounts  expended  in  the  past  for  good  will,  trade-marks, 
trade  brajids,  franchises,  and  other  intangible  assets  of  a  like  character, 
are  controlled  by  the  language  of  the  statute  which  provides  that 
such  assets  "shall  be  included  in  invested  capital  if  the  corporation 
or  partnership  made  payment  bona  fide  therefor  specifically  as  such 
in  cash,  or  tangible  property."  The  Commissioner  of  Internal 
Revenue  will  recognize  adchtions  to  invested  capital  on  account  of 
intangible  assets  only  if  such  assets  have  been  explicitly  paid  for  in  the 
manner  presciibcd  by  the  statute.  Where  expenditures  have  been 
made  for  the  general  development  of  intangible  assets,  and  charged 
as  current  expense,  ho  readjustment  thereof  will  be  aOowed. 

153  (3)  Amounts  under  (1)  and  (2)  above,  expended  on  or  after 
March  1,  1913,  wiE,  in  the  case  of  a  corporation,  be  limited  strictly 
to  items  v/hich  have  not  been  deducted  in  computing  taxable  in- 
come upon  its  income  tax  return.  Wlienever  a  corporation  has 
claimed  and  the  department  has  allowed  a  deduction  in  respect 
to  its  income  tax,  the  item  upon  which  the  deduction  is  based 
shall  not  be  restored  to  the  surplus  account  nor  included  in  the 
invested  capital. 

154  (4)  The  taxpayer  sliaU  in  liis  return  to  the  Commissioner  of  Internal 
Revenue  make  a  statement  of  the  proposed  additions,  specifymg  the 
kinds  and  amomits  of  property  involved,  the  years  in  which  the 
expenditures  were  made,  and  the  method  followed  m  distinguishing 
bctvv'coi  capital  outlays  and  current  expenses. 

155  (5)  Tile  taxpayer  shall  also  show  that  adequate  provision  has  been 
made  for  the  depletion,  depreciation,  or  obsolescence  of  such  of  the 
assets  so  acquired  as  are,  under  the  rulings  of  the  department,  subject 
to  recognized  depreciation. 

158  Art.  65.  Invested  capital  of  insurance  companies. — («)  The  in- 
vested capital  of  a  mutual  insurance  company  will  be  deemed  to  con- 
sist oi  the  sum  of  (1)  any  sui^lus  or  contingent  reserves  maintained 
for  the  general  use  of  the  business,  plus  (2)  any  legal  reserves  the  net 
additions  to  which  are  included  in  the  net  income  subject  to  the 
tax — subject  to  the  restrictive  provisions  of  article  44  requiring  the 
exclusion  of  tax-free  assets  other  than  obligations  of  the  United  States. 

157  (6)  The  invested  capital  of  a  stock  insurance  company  will  be 
deemeil  to  consist  of  its  capital  stock,  paid  in  or  earned  surplus  and 
undivided  profits  (subject  to  the  same  restrictive  provision  of  art.  44), 
computed  in  accordance  with  the  provisions  of  article  53. 


IVAK    EXCESS    PKOFil>>  TAX.  27 

INVESTED  CAPITAL— INDIVIDUALS. 

Art.  66.  Items    included    in    invested    capital. — Subject    to    the  158 
limitations  stated  in  these  regulations  the  invested  capital  of  an  in- 
dividual is  measured  by  the  total  of  three  items: 

(1)  Actual  cash  paid  into  the  trade  or  business, 

(2)  Tangible  property  paid  into  the  trade  or  business, 

(3)  Patents  and  copyrights,  and  good  will,  trade-marks,  trade-brands, 
franchises,  and  other  intangible  property.     (See  art.  68.) 

Art.  67.  Valuation  of  tangible  property.— Subject  to  the  refjuire-  159 
ments  of  article  42  as  to  allowance  for  depletion,  depreciation,  and 
obsolescence,  valuation  of  tangible  property  will  be  as  follows: 

In  the  case  of  tangible  property  purchased  with  cash,  the  valuation  160 
will  be  based  upon  the  cost  (estimated  if  not  kno"^Ti)  in  cash  at  the 
time  purchased. 

In  the  case  of  tangible  property  paid  in  as  such  prior  to  January  161 
1,  1914,  the  valuation  will  be  based  upon  its  actual  cash  value  as  of 
that  date.     Adequate  evidence  of  such  value  must  be  furnished  by 
the  taxpayer. 

In  the  case  of  tangible  property  paid  in  on  or  after  January  1, 1914, 163 
the  valuation  will  be  based  upon  its  actual  cash  value  at  the  time  of 
payment.  '.•. 

It  w^iU  be  presumed  that  the  tangible  assets  employed  in  the  trade  163 
or  business  have  been   acquired  with   cash  which  has   been  either 
paid  in  directly  or  derived  from  earnings  of  the  trade  or  business; 
but  the  taxpayer  will  be  entitled  to  show  that  such  assets  were  paid 
in  as  tangible  property. 

Art.  68.  Valuation  of  intangible  property. — Patents  and  copATights,  164 
and  good  wiU,  trade-marks,  trade-brands,  franchises,  and  other  similar 
intangible  assets  may  be  included  in  invested  capital  at  a  value  not 
to  exceed  the  actual  cash  paid  therefor  or  the  actual  cash  value  at 
the  time  of  payment  of  the  tangible  ])roperty  paid  therefor,  but 
only  if  bona  fide  payment  was  made  therefor  specifically  as  such  in 
cash  or  tangible  property. 

Art.  69.  Profits  earned  during  taxable  year  may  be  included. — The  165 
restriction  in  respect  of  undivided  profits  earned  during  the  taxable 
year  which  is  imposed  upon  corporations  and  partner-hips  does  not 
apply  to  individuals,  and  therefore,  unless  otherwise  shown,  the 
profits  of  the  taxable  year  rcmaijiing  in  the  trade  or  business  wiU  be 
decjned  to  have  arisen  ratably  throughout  the  year,  and  the  capital 
at  the  beginning  of  the  year  may  be  increased  by  the  total  amount  of 
such  profits  remaining  in  the  trade  or  business  averaged  monthly  over 
the  year. 

Art.  70.  Rule  for  computing  invested  capital. — Where  an  individual  166 
keeps  book«  of  account  liis  invested  capital  will  be  found  in  his  capital 
account  (under  whatever  name  it  may  be  called)  after  making  therein 


28  WAR  EXCESS  PEOPITS  TAX. 

any  adjustments  or  corrections  required  by  these  regulations,  pro- 
vided that  the  assets  other  than  those  not  allowed  to  be  included 
equal  or  exceed  the  amount  of  such  capital  account.  Otherwise  the 
invested  capital  shall  be  the  amount  of  such  assets. 

167  Wheve  an  individual  does  not  keep  books  of  account  he  shoidd  pre- 
pare and  preserve  a  statement  as  at  the  beginning  of  the  taxable  year 
and  as  at  the  end  of  the  taxable  3'ear,  showing  in  full  all  his  assets 
valued  in  accordance  with  these  regulations,  and  all  his  liabilities. 
The  excess  of  such  assets  over  such  liabilities  at  the  beginning  of 
the  year  and  again  at  the  end  of  the  year  will  constitute  the  invested 
capital  of  the  individual  on  those  dates,  respectively,  provided,  that 
in  each  case  the  assets  other  than  those  not  allowed  to  be  included 
equal  or  exceed  the  amount  of  such  excess.  Otherwise  the  invested 
capital  shaO  be  the  amount  of  such  assets.  The  amount  of  the 
difference  between  the  capital  thiLS  shown  as  at  the  beginning  of  the 
year  and  at  the  end  of  the  3'ear  wiU,  in  the  absence  of  evidence  to 
the  contrary,  be  deemed  to  have  arisen  ratably  throughout  the  year, 
and  the  capital  at  the  begmning  of  the  year  will  be  increased  or 

,  decreased,  as  the  case  may  be,  by  such  amount  averaged  monthly 
over  the  year. 

168  If  an  individual  is  engaged  in  more  than  one  trade  or  business 
having  invested  capital,  then  his  invested  capital  for  the  purposes 
of  computing  the  deduction  and  applying  the  rates  of  taxation  wiU 
be  determined  by  taking  the  total  invested  capital  of  all  such  trades 
or  businesses. 

169  The  terms  "assets"  and  "liabilities"  as  used  in  this  article  relate 
only  to  the  assets  or  liabilities  of  the  trade  or  business. 

NOMINAL  CAPITAL. 

170  Art.  71.  Application  of  section  209. — Section  209  (see  art.  15)  ap- 
plies primarily  to  occupations,  professions,  trades,  and  businesses 
engaged  principally  in  rendering  personal  service  in  wliicli  the  em- 
ployment of  capital  is  not  necessary  and  the  earnings  of  which  are 
to  be  ascribed  primarily  to  the  activities  of  the  owners. 

171  In  determining  whether  a  trade  or  business  is  taxable  under  article 
15  no  weight  will  be  given  to  the  fact  that  it  is  carried  on  by  means 
of  i^ersonal  service  unless  the  principal  owners  are  regularly  engaged 
in  the  active  conduce  of  the  trade  or  business. 

172  Art.  72.  Application  of  section  209  not  to  be  affected  by  mere  size 
of  capital,  form  of  organization,  etc. — -Business  concerns  which  render 
professional  or  personal  service  and  are  of  the  class  normally  taxable 
under  article  15  shall  not  bo  taken  out  of  that  class  merely  because 
of  the  size  of  the  capital  if  the  employment  of  such  capital  is  neces- 
sitated by  delay  and  irregularity  in  the  receipt  of  fees,  etc.,  or  if  such 
capital  is  wholly  or  mairily  used  as  a  fund  from  which  to  advance 


WAR  EXCESS  PROFITS   TAX.  29 

salaries,  wages,  etc.,  or  to  provide  office  furniture,  accommodations, 
and  equipment,  nor  because  of  the  form  of  organization,  whether 
corporation  or  partnership,  nor  in  the  case  of  a  partnership  because 
of  the  number  of  partners. 

Art.  73.  Agents  and  brokers. — Agents  and  brokers  requiring  and  173 
using  no  capital  or  merely  a  nominal  capital  in  their  business  are 
taxable  mider  article  15,  but  commission  houses  regularly  employ- 
ing a  substantial  amount  of  capital,  whether  to  lend  to  principals 
or  to  carry  goods  on  their  own  account,  are  not  deemed  to  be  agents 
or  brokers  and  are  taxable  under  the  provisions  of  article  16. 

Art.  74.  Meaning  of  "nominal  capital";  businesses  which  will  not  174 
be  deemed  to  have  nominal  capital. — The  term  "nominal  capital"  as 
used  in  section  209  means  in  general  a  small  or  negligible  capital 
whose  use  in  a  particular  trade  or  business  is  incidental.  The  fol- 
lowing will  not  be  construed  as  businesses  having  a  nominal  capital 
for  purposes  of  excess  profits  tax: 

{a)  A  business  which  because  of  conditions  arising  fiom  the  war  175 
or  exceptional  opportunities  for  profits  earns  a  disproportionately 
high  rate  of  profit  during  the  taxable  year,  if  it  belongs  to  a  class 
which  necessarily  and  customarily  requires  capital  for  its  operation. 
In  the  determination  of  doubtfid  cases  stress  will  be  laid  upon  the 
normal  relation  of  net  income  to  capital  during  prewar  years; 

(6)  Corporations  wiiich,  although  their  capitalization  is  nomiutd,  176 
employ  a  substantial  amount  of  capital  in  their  business; 

(c)  A  business  having  a  substantial  capital,  but  whose  invested  177 
capital  within  the  meaning  of  section  207  is  reduced  to  a  nominal 
amount  by  the  operation  of  the  restrictive  clauses  of  that  section, 
e.  g.,  where  the  capital,  consisting  originally  of  a  small  amount  of  cash 
paid  in,  has  since  appi-eciated  in  value,  or  v/herc  the  capital  is  largely 
covered  by  indebtedness  or  consists  principally  of  tax-free  securities 
or  of  intangible  assets  built  up  or  developed  by  expenditures  which 
have  been  regularly  deducted  as  items  of  current  expense. 

RETURNS. 

Art.  75.  When  a  return  of  information  as  to  the  invested  capital  178 
and  net  income  for  the  prewar  period  will  not  be  required. — For  the 
purposes  of  the  excess  profits  tax,  a  return  of  infojivsation  v,-ith 
respect  to  the  invested  capital  and  net  incoine  for  the  prev7ar  period 
will  not  be  required  of  a  corporation,  partnership,  or  individual  in  the 
following  cases : 

(1)  If  the  taxpayer  accepts  the  mininmm  percentage,  viz.,  7  per  179 
cent,  as  the  percentage  to  be  used  in  computing  the  deduction  un<ier 
article  21;  or 

(2)  If  the  trade  or  business  is  taxable  oidy  at  the  8  i)er  ('(Mil  rale  180 
under  article  15. 


8()  AVAR  EXCESS  PROFITS  TAX. 

181  This  article  must  not  hv  construed  as  not  requiring  a  return  of 
information  as  to  all  facts  which  may  be  necessary  for  the  ascertain- 
ment of  the  capital  and  income  for  the  taxable  year  whenever  such  a 
return  is  required  by  the  Commissioner  of  Internal  Revenue. 

183  iVrt.  7G.  a  married  v/oinan  may  make  separate  return, — A  mar- 
ried woman  who  is  a  sole  trader  or  is  entitled  to  any  taxable  in- 
come to  her  sole  and  separate  use  may,  for  purposes  of  the  excess- 
profits  tax,  make  a  separate  return  in  the  same  manner  as  any  othoi" 
individual. 

183  Art.  77.  When  affiliated  corporations  must  furnish  information  as 
to  intercorporate  relations. — For  the  purpose  of  the  excess  profits 
tax  every  corporation  will  describe  in  its  return  all  its  intercorporate 
relationships  with  other  corporations  w^ith  which  it  is  affiliated,  and 
will  furnisli  such  information  in  relation  thereto  as  will  enable  the 
Commissioner  of  Internal  Revenue  to  compute  the  amount  of  the 
tax  properly  due  from  each  corporation  on  the  basis  of  an  equitable 
and  lawful  accounting. 

184  For  the  purpose  of  this  regulation  two  or  more  cori)orations  will  bo 
deemed  to  be  affiliated  (1)  when  one  such  corporation  owns  directly 
or  controls  through  cl<^sely  affiliated  interests  or  by  a  nominee  or 
nominees,  all  or  substantially  all  of  the  stocic  of  the  other  or  others, 
or  when  substantially  all  of  the  stock  of  two  or  more  corporations 
is  owned  by  the  same  individual  or  partnership,  and  both  or  all 
of  such  corporations  are  engaged  in  the  same  or  a  closely  related 
business;  or  (2)  when  one  such  corporation  (a)  buys  from  or  sells 
to  another  products  or  services  at  prices  above  or  below  the  current 
market,  thus  effecting  an  artificial  distribution  of  profits,  or  (b)  in 
an}-  way  so  arranges  its  fuiancial  relationsiiips  with  another  cor- 
poration as  to  assign  to  it  a  disproportionate  share  of  net  income 
or  invested  capital. 

185  Art.  78.  When  affiliated  corporations  may  be  required  to  make 
consolidated  return. — Whenever  necessary  to  more  equitably  deter- 
mine the  invested  capital  or  taxable  income,  the  Commissioner  of 
Internal  Revenue  may  require  corporations  classed  as  affiliated 
under  article  77  to  furnish  a  consolidated  return  of  net  income  and 
invested  capital.  ^Vliere  such  consolidated  return  is  required  it  may 
be  made  by  any  one  or  more  of  such  corporations  or  by  aU  of  them 
acting  jointly;  but  if  such  affiliated  corporations,  when  requested  to 
file  such  consolidated  return,  neglect  or  refuse  to  do  so,  the  Commis- 
sioner of  Int«'ni'd  Revenue  may  cause  an  examination  of  the  books 
of  all  such  corporations  to  be  made  and  a  consolidated  statement  to 
be  made  from  such  examination.  In  cases  where  consolidated  re- 
turns are  accepted,  the  total  tax  will  be  computed  in  the  fu-st  in- 
stance as  a  unit  upon  the  basis  of  the  consohdated  return  and  wiU 
be  assessed  upoa  the  respective  affiliated  corporations  in  such  pro- 


WAR   EXCESS   PROFITS   TAX.  31 

portions  as  may  be  agreed  among  them.  If  no  siicli  agreement  is 
made  the  tax  will  be  assessed  upon  each  such  corporation  in  accord- 
ance with  the  net  income  and  invested  capital  properly  assignable 

to  it. 

ASSESSMENT  AND  COLLECTION. 

Art.  79.  Assessment  and  collection  governed  by  income  tax  regu-  186 
lations. — All  excess  profits  taxes  to  which  any  taxpayer  is  subject 
shall  be  assessed  and  collected  at  the  same  times  and  in  the  same 
manner  as  provided  with  respect  to  income  taxes  in  the  income  tax 
regidations  in  so  far  as  the  same  are  applicable. 

Daniel  C.  Roper, 

Commissioner  of  Internal  Revenue. 
Approved : 

;        W.  G.  McAdoo, 

Secretary  of  the  Treasury. 


1 


APPENDIX. 

fPubUo,  No.  60, 65th  Congress— H.  B.  4280.| 
AN  ACT  To  proTida  revenue  to  defray  war  expenses,  and  for  otHerpurposM. 
•  *«*«*« 

Title  II.— Wau  Excess  Peofits  Tax. 

Seo.  200.  That  when  used  in  this  title— 

The  term  "corporation"  includes  joint-stock  companiea  or  associations  and  Insur- 
ance companies; 

The  term  "domestic"  means  created  under  the  law  of  the  United  States,  or  of  any 
State,  Territory,  or  District  thereof,  and  the  term  "foreign"  means  created  under 
th«  law  of  any  other  possession  of  the  United  States  or  of  any  foreign  country  or 
government; 

The  term  "United  States"  means  only  the  States,  the  Territories  of  Alaska  and 
Hawaii,  and  the  District  of  Columbia; 

The  term  "taxable  year"  means  the  twelve  months  ending  December  thirty-first, 
excepting  in  the  case  of  a  corporation  or  partnership  which  has  fixed  its  own  fiscal 
year,  in  which  case  it  means  such  fiscal  year.  The  first  taxable  year  shall  be  the  year 
ending  December  thirty-first,  nineteen  hundred  and  seventeen,  except  that  in  the 
case  of  a  corporation  or  partnership  which  has  fix;ed  its  own  fiscal  year,  it  shall  be  the 
fiscal  year  ending  during  the  calendar  year  nineteen  hundred  and  seventeen.  If 
a  corporation  or  partnership,  prior  to  March  first,  nineteen  hundred  and  eighteen, 
makes  a  return  covering  its  own  fiscal  year,  and  includes  therein  the  income  received 
during  that  part  of  the  fiscal  year  falling  within  the  calendar  year  nineteen  hundred 
and  sixteen,  the  tax  for  such  taxable  year  shall  be  that  proportion  of  the  tax  computed 
upon  the  net  income  during  such  full  fiscal  year  which  the  time  from  January  first, 
nineteen  hundred  and  seventeen,  to  the  end  of  such  fiscal  year  bears  to  the  full  fiscal 
year;  and 

The  terra  "prewar  period' '  means  the  calendar  years  nineteen  hundred  and  eleven, 
aineteen  hundred  and  twelve,  and  nineteen  hundred  and  thirteen,  or,  if  a  corpora- 
tipn  nr  partnership  was  not  in  existence  or  an  individual  was  not  engaged  in  a  trade 
or  business  during  the  whole  of  such  period,  then  as  many  of  such  years  during  the 
whole  of  wliioh  the  corporation  or  partnership  was  in  existence  or  the  individual  was 
engaged  in  the  trade  or  business. 

The  terms  "trade"  and  "business"  include  professions  and  occupations. 

The  term  "net  income"  means  in  the  case  of  a  foreign  corporation  or  partnership 
or  a  nonresident  alien  indiWdual,  the  net  income  received  from  sources  within  the 
United  States. 

Sec.  201.  That  in  addition  to  the  taxes  under  existing  law  and  under  this  act 
there  shall  be  levied,  assessed,  collect(;d,  and  paid  for  each  taxable  year  upon  the 
income  of  every  corporation,  partnership,  or  individual,  a  tax  (hereinafter  in  this 
title  referred  to  as  the  tax)  equal  to  the  following  percentages  of  the  net  income: 

Twenty  per  centum  of  the  amount  of  the  net  income  in  excess  of  the  deduction 
(determined  as  hereinaftt-r  jirovided)  and  not  in  excess  of  fifteen  per  centum  of  the 
invested  capital  for  the  taxable  year; 

Twenty-five  per  centum  of  the  amount  of  the  net  income  in  excess  of  fifteen  per 
centum  and  not  in  excess  of  twenty  per  centum  of  such  capital; 

Thirty-five  per  centum  of  the  amount  of  the  net  income  in  excess  of  twenty  pe» 
centum  and  not  in  excess  of  twenty-five  per  centum  of  'jucii  capital; 

33 


34  WAR   EXCESS   PROFITS   TAX. 

Forty-fivp  per  centum  of  the  amount  ol'  the  net  income  in  excess  of  twenty-fivw 
per  centum  and  not  in  excess  of  thirty-three  per  centum  of  such  capital;  and 

Sixty  per  centum  of  the  amount  of  the  net  income  in  excess  of  thirty-three  per 
centum  of  such  capital. 

For  the  purpose  of  this  title  every  corporation  or  partnership  not  exempt  under 
the  provisions  of  this  section  shall  be  deemed  to  be  engaged  in  business,  and  all  the 
trades  and  businesses  in  which  it  is  engaged  shall  be  treated  as  a  single  trade  or  busi- 
ness, and  all  its  income  from  whatever  source  derived  shall  be  deemed  to  be  recejired 
from  such  trade  or  business.  »n 

This  title  shall  apply  to  all  trades  or  businesses  of  whatever  description,  whether 
continuously  carried  on  or  not,  except — 

(a)  In  the  case  of  officers  and  employees  under  the  United  States,  or  any  State, 
Territory,  or  the  District  of  Columbia,  or  any  local  subdivision  thereof,  the  com- 
pensation or  fees  received  by  them  as  such  officers  or  employees; 

(b)  Corporations  exempt  from  tax  under  the  provisions  of  section  eleven  of  Title 
I  of  such  Act  of  September  eighth,  nineteen  hundred  and  sixteen,  as  amended  by 
this  Act,  and  partnerships  and  individuals  carrying  on  or  doing  the  same  busine*,rT 
or  coming  within  the  same  description;  and 

(c)  Incomes  derived  from  the  business  of  life,  health,  and  accident  insurance  com- 
bined in  one  policy  issued  on  the  weekly  premium  payment  plan. 

Sec.  202.  That  the  tax  shall  not  be  imposed  in  the  case  of  the  trade  or  business  of 
a  foreign  corporation  or  partnership  or  a  nonresident  alien  individual,  the  net  income 
of  which  trade  or  business  during  the  taxable  year  is  less  than  $3,000. 

Sec.  203.  That  for  the  purposes  of  this  title  the  deduction  shall  be  as  follows,  except 
as  otherwise  in  this  title  provided — 

(a)  In  the  case  of  a  domestic  corporation,  the  sum  of  (1)  an  amount  equal  to  the 
same  percentage  of  the  invested  capital  for  the  taxable  year  which  the  average  amount 
of  the  annual  net  income  of  the  trade  or  business  during  the  prewar  period  was  of 
the  invested  capital  for  the  prewar  period  (but  not  less  than  seven  or  more  than  nine 
per  centum  of  the  invested  capital  for  the  taxable  year),  and  (2)  $3,000; 

(b)  In  the  case  of  a  domestic  partnership  or  of  a  citizen  or  resident  of  the  United 
States,  the  sum  of  (1)  an  amount  equal  to  the  same  percentage  of  the  invested  capital 
for  the  taxable  year  which  the  average  amount  of  the  annual  net  income  of  the  trade 
or  business  during  the  prewar  period  was  of  the  invested  capital  for  the  prewar  period 
(but  not  less  than  seven  or  more  than  nine  per  centum  of  the  invested  capital  for  the 
taxable  year),  and  (2)  $6,000; 

(c)  In  the  case  of  a  foreign  corporation  or  partnership  or  of  a  nonresident  aliea  : 
individual,  an  amount  ascertained  in  the  same  manner  as  provided  in  subdivisiona' 
(a)  and  (b)  without  any  exemption  of  $3,000  or  $6,000. 

(d)  If  the  Secretary  of  the  Treasury  is  unable  satisfactorily  to  determine  the  average 
amount  of  the  annual  net  income  of  the  trade  or  business  during  the  prewar  period, 
the  deduction  shall  be  determined  in  the  same  manner  as  provided  in  section  two 
hundred  and  five. 

Sec.  204.  That  if  a  corporation  or  partnership  was  not  in  existence,  or  an  individual 
was  not  engaged  irrthe  trade  or  business,  during  the  whole  of  any  one  calendar  year 
during  the  prewar  period,  the  deduction  shall  be  an  amount  equal  to  eight  per  centum 
of  the  invested  capital  for  the  taxable  year,  plus  in  the  case  of  a  domestic  corporation 
$3,000,  and  in  the  case  of  a  domestic  partnership  or  a  citizen  or  resident  of  the  United 
States  $6,000. 

A  trade  or  business  caiTied  on  by  a  corporation,  partnership,  or  individual,  although 
formally  organized  or  reorganized  on  or  after  January  second,  nineteen  hundred  and 
thirteen,  which  is  substantially  a  continuation  of  a  trade  or  business  carried  on  prior 
to  that  date,  shall,  for  the  purposes  of  this  title,  be  deemed  to  have  been  in  existence 
prior  to  that  date,  and  the  net  income  and  invested  capital  of  its  predecessor  prior 
to  that  date  shall  be  deemed  to  have  been  its  net  income  and  invested  capital. 


WAR  EXCESS   PROFITS  TAX.  35 

Sec.  205.  (a)  That  if  the  Secretary  of  the  Treasury,  upon  complaint  finds  either 

(1)  that  during  the  prewar  period  a  domestic  corporation  or  partnership,  or  a  citizen 
or  resident  of  the  United  States,  had  no  net  income  from  the  trade  or  business,  or 

(2)  that  during  the  prewar  period  the  percentage,  which  the  net  income  was  of  the 
invested  capital,  wag  low  as  compared  with  the  percentage,  which  the  net  income  dur- 
ing such  period  of  representative  corporations,  partnerships,  and  individuals,  engaged 
in  a  like  or  similar  trade  or  business,  was  of  their  invested  capital,  then  the  deduction 
shall  be  the  sum  of  (1)  an  amount  equal  to  the  same  percentage  of  its  invested  capital 
for  the  taxable  year  which  the  average  deduction  (determined  in  the  same  manner 
as  provided  in  section  two  hundred  and  three,  without  including  the  |3,000  or  $6,000 
therein  referred  to)  for  such  year  of  representative  corporations,  partnerships,  or 
individuals,  engaged  in  a  like  or  similar  trade  or  business,  is  of  their  average  invested 
capital  for  such  year  plus  (2)  in  the  case  of  a  domestic  corporation  $3,000,  and  in  the 
case  of  a  domestic  partnership  or  a  citizen  or  resident  of  the  United  States  $6,000. 

The  percentage  which  the  net  income  waa  of  the  invested  capital  in  each  trade  or 
business  shall  be  determined  by  the  Commissioner  of  Internal  Revenue,  in  accordance 
wi^  regulations  prescribed  by  him,  with  the  approval  of  the  Secretary  of  the  Treas- 
uiy.  In  the  case  of  a  corporation  or  partnership  which  has  fixed  ita  own  fiscal  year, 
the  percentage  determined  by  the  calendar  year  ending  during  such  fiscal  year  shall 
be  used. 

(b)  The  tax  shall  be  assessed  upon  the  basis  of  the  deduction  determined  as  pro- 
vided in  section  two  hundred  and  three,  but  the  taxpayer  claiming  the  benefit  of 
this  section  may  at  the  time  of  making  the  return  file  a  claim  for  abatement  of  the 
amount  by  which  the  tax  so  assessed  exceeds  a  tax  computed  upon  the  basis  of  the 
deduction  determined  as  pro\-ided  in  this  section.  In  such  event,  collection  of  the 
part  of  the  tax  covered  by  such  claim  for  abatement  shall  not  be  made  until  the  claim 
la  decided,  but  if  in  the  judgment  of  the  Commissioner  of  Internal  Revenue,  the 
interests  of  the  United  States  would  be  jeopardized  thereby  he  may  require  the 
claimant  to  give  a  bond  in  such  amount  and  with  such  sureties  as  the  commissioner 
may  think  wise  to  safeguard  such  interests,  conditioned  for  the  payment  of  any  tax 
found  to  be  due,  with  the  interest  thereon,  and  if  such  bond,  satisfactory  to  the  com- 
missioner, is  not  given  within  such  time  aa  he  prescribes,  the  full  amount  of  tax 
assessed  shall  be  collected  and  the  amount  overpaid,  if  any,  shall  upon  final  decision 
of  the  application  be  refunded  as  a  tax  erroneously  or  illegally  collected. 

Sec.  206.  That  for  the  purposes  of  this  title  the  net  income  of  a  corporation  shall 
be  ascertained  and  returned  (a)  for  the  calendar  years  nineteen  hundred  and  eleven 
and  nineteen  hundred  and  twelve  upon  the  same  basis  and  in  the  same  manner  aa 
provided  in  section  thirty-eight  of  the  Act  entitled  "An  Act  to  provide  revenue, 
equalize  duties,  and  encourage  the  industries  of  the  United  States,  and  for  other  pur- 
poses," approved  August  fifth,  nineteen  hundred  and  nine,  except  that  income  taxea 
paid  by  it  within  the  year  imposed  by  the  authority  of  the  United  States  shall  be 
included;  (b)  for  the  calendar  year  nineteen  hundred  and  thirteen  upon  the  same 
basis  and  in  the  same  manner  as  provided  in  section  II  of  the  Act  entitled  "An  Act 
to  reduce  tariff  duties  and  to  provide  revenue  for  the  Government,  and  for  other 
purposes,"  approved  October  third,  nineteen  hundred  and  thirteen,  except  that 
income  taxea  paid  by  it  within  the  year  imposed  by  the  authority  of  the  United  States 
shall  bo  included,  and  except  that  the  nmounts  roceivc-d  by  it  as  dividends  upon  the 
stock  or  from  the  net  earnings  of  other  corporations,  joint-stock  companies  or  asso- 
ciations, or  insurance  companies,  subject  to  the  tax  imposed  by  section  II  of  such 
Act  of  October  third,  nineteen  hundred  and  thirteen,  shall  be  deducted;  and  (c)  for 
the  taxable  year  upon  the  same  basis  and  in  the  same  manner  as  provided  in  Title  I  of 
the  Act  entitled  "An  Act  to  increase  the  revenue,  and  for  other  purpo.ses, "  approved 
September  eighth,  nineteen  hundred  and  sixteen,  as  amended  by  this  Act,  except 
that  the  amounts  received  by  it  as  dividends  upon  tlie  stock  or  from  the  net  earnings 
of  other  corporations,  joint-stock  companies  or  a.ssociations,  or  insurance  companies, 


36  WAR    EXCESS   PROFITS   TAX. 

subject  to  the  tux  imposed  by  Title  I  of  such  Act  of  September  eighth,  nineteen  hun- 
dred and  sixteen,  shall  be  deducted. 

The  net  income  of  a  partnership  or  individual  shall  be  ascertained  and  returned 
for  the  calendar  years  nineteen  hundred  and  eleven,  nineteen  hundred  and  twelve, 
and  nineteen  hundred  and  thirteen,  and  for  the  taxable  year,  upon  the  same  basis 
and  in  the  same  manner  as  provided  in  Title  I  of  such  Act  of  September  eighth,  nine- 
teen hundred  and  sixteen,  as  amended  by  this  Act,  except  that  the  credit  allowed 
by  subdivision  (b)  of  section  five  of  such  Act  shall  be  deducted.  There  sl^all  be 
allowed  (a)  in  the  case  of  a  domestic  partnership  the  same  deductions  as  allowed  to 
individuals  in  subdivision  (a)  of  section  five  of  such  Act  of  September  eighth,  nine- 
teen hundred  and  sixteen,  as  amended  by  this  Act;  and  (b)  in  the  case  of  a  foreign 
partnership  the  same  deductions  as  allowed  to  individuals  in  subdivision  (a)  of  section 
Bix  of  such  Act  as  amended  by  this  Act. 

Sec.  207.  That  as  used  in  this  title,  the  term  "invested  capital"  for  any  year 
means  the  average  invested  capital  for  the  year,  as  defined  and  limited  in  this  title, 
averaged  monthly. 

As  used  in  this  title  "invested  capital"  does  not  include  stocks,  bonds  (other "l^n 
obligations  of  the  United  States),  or  other  assets,  the  income  from  which  is  not'sub- 
ject  to  the  tax  imposed  by  this  title  nor  money  or  other  property  borrowed,  and  means, 
subject  to  the  above  limitations: 

(a)  In  the  case  of  a  corporation  or  partnership:  (1)  Actual  cash  paid  in,  (2)  the 
actual  cash  value  of  tangible  property  paid  in  other  than  cash,  for  stock  or  shares  in 
Buch  corporation  or  partnership,  at  the  time  of  such  payment  (but  in  case  such  tang- 
ible property  was  paid  in  prior  to  January  first,  nineteen  hundred  and  fourteen,  the 
actual  cash  value  of  such  property  as  of  January  first,  nineteen  hundred  and  fourteen, 
but  in  no  case  to  exceed  the  par  value  of  the  original  stock  or  sharas  specifically  issued 
therefor),  and  (3)  paid  in  or  earned  surplus  and  undivided  profits  used  or  employed 
in  the  business,  exclusive  of  undivided  profits  earned  during  the  taxable  year:  Pro- 
vided, That  (a)  the  actual  cash  value  of  patents  and  copyrights  paid  in  for  stock  or 
shares  in  such  corporation  or  partnership,  at  the  time  of  such  payment,  shair be  in- 
cluded as  irivested  capital,  but  not  to  exceed  the  par  value  of  such  stock  or  shares 
at  the  time  of  such  payment,  and  (b)  the  good  will,  trade-marks,  trade  brands,  the 
franchise  of  a  corporation  or  partnership,  or  other  intangible  property,  shall  be  in- 
cluded as  invested  capital  if  the  corporation  or  partnership  made  payment  bona 
fide  therefor  specifically  as  such  in  cash  or  tangible  property,  the  value  of  such  good 
will,  trade-mark,  trade  brand,  franchise,  or  intangible  property,  not  to  exceed  t^e 
actual  cash  or  actual  cash  value  of  the  tangible  property  paid  therefor  at  the  time'of 
Buch  payment;  but  good  will,  trade-marks,  trade  brands,  franchise  of  a  corporation 
or  partnership,  or  other  intangible  property,  bona  fide  purchased,  prior  to  March 
third,  nineteen  hundred  and  seventeen,  for  and  with  interests  or  shares  in  a  part- 
nership or  for  and  with  shares  in  the  capital  stock  of  a  corporation  (issued  prior  to 
March  third,  nineteen  hundred  and  seventeen),  in  an  amount  not  to  exceed,  on 
March  thii-d,  nineteen  hundred  and  seventeen,  twenty  per  centum  of  the  total  inter- 
ests or  shares  in  the  partnership  or  of  the  total  .shares  of  the  capital  stock  of  the  cor- 
poration, shall  be  included  in  invested  capital  at  a  value  not  to  exceed  the  actual 
cash  value  at  the  time  of  such  purchase,  and  in  case  of  issue  of  stock  therefor  not  to 
exceed  the  par  value  of  such  stock;  • 

(b)  In  the  case  of  an  individual,  (1)  actual  cash  paid  into  the  trade  or  business,  and 
(2)  the  actual  cash  value  of  tangible  property  paid  into  the  trade  or  business,  other  than 
cash,  at  the  time  of  such  payment  (but  in  case  such  tangible  property  was  paid  in 
prior  to  January  first,  nineteen  hundred  and  fourteen,  the  actual  cash  value  of  such 
property  as  of  January  first,  nineteen  hundred  and  fourteen),  and  (3)  the  actual  cash 
value  of  patent^  copyright?,  good  will,  trade-marks,  trade  brands,  franchises,  or  other 
intangible  property,  paid  into  the  trade  or  business,  at  the  time  of  such  payment, 
if  payment  was  made  therefor  specifically  as  such  in  cash  or  tangible  property,  not 


WAR  EXCESS  PEOFITS  TAX.  37 

to  exeeed  the  actual  cash  or  actual  cash  value  of  the  tangible  property  bona  fide 
paid  therefor  at  the  time  of  such  payment. 

In  the  case  of  a  foreign  corporation  or  partnership  or  of  a  nonresident  alien  indi\idual 
the  term  "invested  capital"  means  that  proportion  of  the  entii-e  invested  capital,  as 
defined  and  limited  in  this  title,  which  the  net  income  from  sources  within  the  United 
States  bears  to  the  entii'e  net  income. 

Sec.  208.  That  in  case  of  the  reorganization,  consolidation  or  change  of  ownership 
of  a  trade  or  business  after  March  thii'd,  nineteen  hundred  and  seventeen,  if  an  interest 
or  control  in  such  trade  or  business  of  fifty  per  centum  or  more  remains  in  control  of 
the  same  persons,  corporations,  associations,  partnerships,  or  any  of  them,  then  in 
ascertaining  the  invested  capital  of  the  trade  or  business  no  asset  transferred  or  received 
from  the  prior  trade  or  business  shall  be  allowed  a  greater  value  than  would  have  been 
allowed  under  this  title  in  computing  the  invested  capital  of  such  prior  trade  or  busi- 
ness if  such  asset  had  not  been  so  transfeiTed  or  received,  unless  such  asset  was  paid 
for  specifically  as  such,  in  cash  or  tangible  property,  and  then  not  to  exceed  the  actual 
cash  or  actual  cash  value  of  the  tangible  property  paid  therefor  at  the  time  of  such 
payment. 

Sec.  209.  That  in  the  case  of  a  trade  or  business  having  no  invested  capital  or  not 
more  than  a  nominal  capital  there  shall  be  levied,  assessed,  collected  and  paid,  in 
addition  to  the  taxes  under  existing  law  and  under  this  Act,  in  lieu  of  the  tax  imposed 
by  section  two  hundred  and  one,  a  tax  equivalent  to  eight  per  centum  of  the  net 
Income  of  such  trade  or  business  in  excess  of  the  following  deductions:  In  the  case  of 
a  domestic  corporation  $3,000,  and  in  the  case  of  a  domestic  partnership  or  a  citizen 
or  resident  of  the  United  States  $6,000;  in  the  case  of  all  other  trades  or  business,  no 
deduction. 

Sec.  210.  That  if  the  Secretary  of  the  Treasury  is  unable  in  any  case  satisfactorily 
to  determine  the  invested  capital,  the  amount  of  the  deduction  shall  be  the  sum  of 
(1)  an  amount  equal  to  the  same  proportion  of  the  net  income  of  the  trade  or  businesa 
received  during  the  taxable  year  as  the  proportion  which  the  average  deduction 
(determined  in  the  same  manner  as  provided  in  section  two  hundred  and  three, 
without  including  the  $3,000  or  $6,000  therein  referred  to)  tor  the  same  calendar  year 
of  rei^resentative  corporations,  partnerships,  and  individuals,  engaged  in  a  like  or 
■imilar  trade  or  businesa,  bears  to  the  total  net  income  of  the  trade  or  business  received 
by  such  corporations,  partnerships,  and  individuals,  plus  (2)  in  the  case  of  a  domestic 
corporation  $3,000,  and  in  the  case  of  a  domestic  partnership  or  a  citizen  or  resident 
of  the  United  States  $6,000. 

ll'or  the  purpose  of  this  section  the  proportion  between  the  deduction  and  the  net 
Income  in  each  trade  or  business  shall  be  determined  by  the  Commissioner  of  Internal 
Revenue  in  accordance  with  regulations  prescribed  by  him,  with  the  approval  of  the 
Secretary  of  the  Treasury.  In  the  case  of  a  corporation  or  partnership  which  has  fixed 
its  own  fiscal  year,  the  proportion  determined  for  the  calendar  year  ending  during  such 
fiscal  year  shall  be  used. 

Sec.  211.  That  every  foreign  partnership  having  a  net  income  of  $3,000  or  more  for 
the  taxable  year,  and  every  domestic  partnership  having  a  net  income  of  $6,000  or 
more  for  the  taxable  year,  shall  render  a  correct  return  of  the  income  of  the  trade  or 
business  for  the  taxable  year,  setting  forth  specifically  the  gross  income  for  such  year, 
and  the  deductions  allowed  in  this  title.  Such  returns  shall  be  rendered  at  the  same 
time  and  in  the  same  manner  as  is  prescribed  for  income-tax  returns  under  Title  I  of 
Buch  Act  of  September  eighth,  nineteen  hundred  and  sixteen,  as  amended  by  this 
Act. 

Sec  212.  That  all  administrative,  special,  and  general  provisions  of  law,  including 
the  laws  in  relation  to  the  assessment,  remission,  collection,  and  refund  of  internal- 
revenue  taxes  not  heretofore  specifically  repealed,  and  not  inconsistent  with  the 
provisions  of  this  title  are  hereby  extended  and  made  applicable  to  all  the  provisions 
of  this  title  and  to  the  tax  herein  imposed,  and  all  provisions  of  Title  1  o'  such  Act  of 


38  WAR  EXCESS  TEOFITS  TAX. 

September  eighth,  nineteen  hundred  and  sixteen,  as  amended  by  this  Act,  relating  to 
returns  and  payment  of  the  tax  therein  imposed,  including  penalties,  are  hereby  made 
applicable  to  the  tax  imposed  by  this  title. 

Sec.  213.  That  the  Commissioner  of  Internal  Revenue,  with  the  approval  of  the 
Secretary  of  the  Treasury,  shall  make  all  necessary  regulations  for  carrying  out  the 
proAisions  of  this  title,  and  may  requke  any  corporation,  partnership,  or  individual, 
subject  to  the  provisions  of  this  title,  to  furnish  him  with  such  facts,  data,  and  infor- 
mation as  in  his  judgment  arc  necessary  to  collect  the  tax  imposed  by  this  title. 

Sec.  214.  That  Title  II  (sections  two  hundred  to  two  hundred  and  seven,  inclu- 
sive) of  the  Act  entitled  "An  Act  to  provide  increased  revenue  to  defray  the  expenses 
of  the  increased  appropriations  for  the  Army  and  Na\'y,  and  the  extensions  of  fortifi- 
cations, and  for  other  purposes, "  approved  March  thkd,  nineteen  hundred  and  seven- 
teen, is  hereby  repealed. 

Any  amount  heretofore  or  hereafter  paid  on  account  of  the  tax  imposed  by  such 
Title  II,  shall  be  credited  toward  the  payment  of  the  tax  imposed  by  this  title,  and  if 
the  amount  so  paid  exceeds  the  amount  of  such  tax  the  excess  shall  be  refunded  as  a 
tax  erroneously  or  illegally  collected.  tjLqo 

Subdivision  (1)  of  section  three  hundred  and  one  of  such  Act  of  September  eigbt-h, 
nineteen  hundred  and  sixteen,  is  hereby  amended  so  that  the  rate  of  tax  for  the 
taxable  year  nineteen  hundred  and  seventeen  shall  be  ten  per  centum  instead  of 
twelve  and  one-half  per  centum,  as  therein  provided. 

Subdi^'ision  (2)  of  such  section  is  hereby  amended  to  read  as  follows : 

"(2)  This  section  shall  cease  to  be  of  effect  on  and  after  January  fu'st,  nineteen 
hundred  and  eighteen. " 

Title  X. — Administrative  Provisions.  ,,, 

m  *****  * 

Sec.  1001.  That  all  administrative,  special,  or  stamp  provisions  of  law,  including 
the  law  relating  to  the  assessment  of  taxes,  so  far  as  applicable,  are  hereby  extended 
to  and  made  a  part  of  this  Act,  and  every  person,  corporation,  partnership,  or  asso^Ki- 
tion  liable  to  any  tax  imposed  by  this  Act,  or  for  the  collection  thereof,  shall  keep 
such  records  and  render,  under  oath,  such  statements  and  returns,  and.  shall  comply 
with  such  regulations  aa  the  Commissioner  of  Internal  Revenue,  with  the  approval 
of  the  Secretary  of  the  Treasury,  may  from  time  to  time  prescribe. 

******* 

Sec.  1003.  That  in  all  cases  where  the  method  of  collecting  the  tax  impo^3d  by  this 
Act  ia  not  specifically  provided,  the  tax  shall  be  collected  in  such  manner  as  -the 
Commissioner  of  Internal  Revenue  ^\■ith  the  approval  of  the  Secretary  of  the  Treasury 
may  prescribe.  All  administrative  and  penalty  provisions  of  Title  VIII  of  this  Act, 
in  80  far  aa  applicable,  shall  apply  to  the  collection  of  any  tax  which  the  Commissioner 
of  Internal  Revenue  determines  or  prescribes  shall  be  paid  by  stamp. 

Sec  1004.  That  whoever  fails  to  make  any  return  requii'ed  by  this  Act  or  the  regu- 
lations made  under  authority  thereof  within  the  time  prescribed  or  who  makes  any 
false  or  fraudulent  return,  and  whoever  evades  or  attempts  to  evade  any  tax  imposed 
by  this  Act  or  fails  to  collect  or  truly  to  account  for  and  pay  over  any  such  tax,  shall  be 
subject  to  a  penalty  of  not  more  than  $1,000,  or  to  imprisonment  for  not  more  than  one 
year,  or  both,  at  the  discretion  of  the  coiu't,  and  in  addition  thereto  a  penalty  of  double 
the  tax  evaded,  or  not  collected,  or  accounted  for  and  paid  over,  to  be  assessed  and 
collected  in  the  same  manner  as  taxes  are  assessed  and  collected,  in  any  case  in  which 
the  punishment  is  not  otherwise  specifically  provided. 

Sec.  1005.  That  the  Commissioner  of  Internal  Revenue,  with  the  approval  of  the 
Secretary  of  the  Treasury,  is  hereby  authorized  to  make  all  needful  rules  and  regu- 
lations for  the  enforcement  of  the  provisions  of  this  Act. 


WAR  EXCESS  PEOFITS   TAX.  39 

Sbc.  1008.  That  in  the  payment  of  any  tax  under  this  Act  not  payable  by  stamp  a 
fractional  part  of  a  cent  shall  be  disregarded  unless  it  amounts  to  one-half  cent  or  more, 
in  which  case  it  shall  be  increased  to  one  cent. 

Sec.  1009.  That  the  Secretary  of  the  Treasury,  under  rules  and  regulations  pre- 
Bcribed  by  him,  shall  permit  taxpayers  liable  to  income  and  excess  profits  taxes  to 
make  payments  in  advance  in  installments  or  in  whole  of  an  amount  not  in  excess 
of  the  estimated  taxes  which  will  be  due  from  them,  and  upon  determination  of  the 
taxes  .actually  due  any  amount  paid  in  excess  shall  be  refunded  as  taxes  erroneously 
CoUedted:  Provided,  That  when  payment  is  made  in  installments  at  least  one-fourth 
of  such  estimated  tax  shall  be  paid  before  the  expiration  of  thirty  days  after  the  close 
of  the  taxable  year,  at  least  an  additional  one-fourth  within  two  months  after  the 
close  of  the  taxable  year,  at  least  an  additional  one-fourth  within  four  months  after 
the  close  of  the  taxable  year,  and  the  remainder  of  the  tax  due  on  or  before  the  time 
now  fixed  by  law  for  such  payment:  Provided  further,  That  the  Secretary  of  the  Treas- 
ury, under  rules  and  regulations  prescribed  by  him,  may  allow  credit  against  such 
taxes  so  paid  in  advance  of  an  amount  not  exceeding  three  per  centum  per  annum 
calculated  upon  the  amount  so  paid  from  the  date  of  such  payment  to  the  date  now 
fi^cfd  by  law  for  such  payment;  but  no  such  credit  shall  be  allowed  on  payments  in 
excess  of  taxes  determined  to  be  due,  nor  on  payments  made  after  the  expiration  of 
four  and  one-half  months  after  the  close  of  the  taxable  year.  All  penalties  provided 
by  existing  law  for  failure  to  pay  tax  when  due  are  hereby  made  applicable  to  any 
failure  to  jiay  the  tax  at  the  time  or  times  required  in  tliis  section. 
...oSec.  1010.  That  under  rules  and  regulations  prescribed  by  the  Secretary  of  the 
Treasury,  collectors  of  internal  revenue  may  receive,  at  par  and  accrued  interest,  cer- 
tificates of  indebtedness  issued  under  section  six  of  the  Act  entitled  "An  Act  to  author- 
ize an  issue  of  bonds  to  meet  expenditures  for  the  national  security  and  defense,  and, 
for  the  purpose  of  assisting  in  the  prosecution  of  the  war,  to  extend  credit  to  foreign 
governments,  and  for  other  purposen,"  approved  April  twenty-fourth,  nineteen  hun- 
dred and  seventeen,  and  any  subsequent  Act  or  Acts,  and  uncertified  checks  in  pay- 
npfent  of  income  and  excess-profita  taxes,  during  such  time  and  under  such  regulations 
as  the  Commissioner  of  Internal  Revenue,  with  the  approval  of  the  Secretary  of  the 
Treasury,  shall  prescribe;  but  if  a  check  so  received  is  not  paid  by  the  bank  on  which 
it  is  drawn  the  person  by  whom  such  check  has  been  tendered  shall  remain  liable  for 
the  payment  of  the  tax  and  for  all  legal  penalties  and  additions  the  same  as  if  such 
check  had  not  been  tendered. 

General  Puovisions. 

I  Sec.  1212.  That  any  amount  heretofore  withheld  by  any  withholding  agent  as 
requited  by  Title  I  of  such  Act  of  September  eighth,  nineteen  hundred  and  sixteen, 
on  accoinit  of  the  tax  imposed  upon  the  income  of  any  individual,  a  citizen  or  resi- 
dent of  the  United  States,  for  the  calendar  year  nineteen  hiuidred  and  seventeen, 
except  in  the  cases  covered  by  subdivision  (c)  of  section  nine  of  such  Act,  as  amended 
by  this  Act,  shall  be  released  and  paid  over  to  such  individual,  and  the  entire  tax 
upon  the  income  of  such  individual  for  such  year  shall  be  assessed  and  collected  in 
the  manner  prescribed  by  such  Act  as  amended  by  this  Act. 

******* 

Sec.  1300.  That  if  any  clause,  sentence,  j^aragraph,  or  part  of  this  Act  shall  for 
any  reason  be  adjudged  by  any  court  of  competent  jurisdiction  to  be  invalid,  such 
judgment  shall  not  affect,  impair,  or  invalidate  the  romauidcr  of  said  Act,  but  .shall 
bo  confined  in  its  operation  to  the  clause,  sentence,  paragraph,  or  part  thereof  directly 
involved  in  the  controversy  in  which  such  judgment  shall  have  been  rendered. 
******* 

Sec.  1303.  That  unless  otherwise  herein  specially  provided,  this  Act  shall  take 
effect  on  the  day  following  its  passage. 

Approved,  October  3,  1917. 

Effective  October  4,  1917. 


INDEX. 

.fatagraph. 
Abatement  claim  on  Form  47  when  making  return  in  cases  of  prewar  income 

being  undeterminable  satisfactorily ;  low  or  none 50 

Accounting: 

Defective;  bearing  on  invested  capital 110 

Adjustment  of,  in  connection  with  surplus i4!),  155 

Individuals — 

Books  kept 166 

Books  not  kept 167 

Ultraconservatism  in  past  years 112 

Accounts  payable  in  relation  to  invested  capital 99 

Accounts  receivable  construed  to  be  tangible  property 104 

Additions  on  annual  balance  sheet  in  computing  "invested  capital" 117 

Adjustments  required  on  annual  balance  sheet  of  corporations  and  partnerships.  117 

Invested  capital  determined  on  basis  of  balance  sheet  as  adjusted 129 

Affiliated  corporations;  returns,  etc 183, 185 

Agents  and  brokers  versus  commission  houses  and  merchan  '.s 173 

Agents,  nominal  capital 173 

Alaska 3,  4 

Amortization  in  relation  to  invested  capital c 115 

Annual  balance  sheet.     {See  "Balance  sheet.") 

Appreciation  in  A'alue  of  assets  in  connection  with  invested  capital 93, 177 

Correction  of  annual  balance  sheet 1 26 

Tangible  property  acquired  prior  to  January  1,  1914 134 

Assessment  and  collection  of  tax 186 

Parent,  sub.sidiary,  and  affiliated  coi-porations 183, 185 

Assets  and  liabilities  in  connection  with  invested  capital  of  individuals 169  , 

Averaging  invested  capital ;  method  of 9-4 

Balance  sheet  required  annually  of  corporations  and  partnerships 131 

Corrections  necessary 117 

Invested  capital  determined  on  basis  of  balance  sheet  as  corrected 129 

Bequest,  vafue  of  is  exempt  from  tax 58 

Bills  payable  in  connection  vath  invested  capital 99 

Bills  receivable  construed  to  be  tangible  property 104 

Bond  may  be  required  when  claim  lor  abatement  is  made  on  making  return  in 

cases  of  prewar  income  being  undeterminable  satisfactorily,  low  or  none 50 

Bonded  indebtedness  versus  capital;  bearing  on  invested  capital 177 

Bonds  in  relation  to  invested  capital 98, 101, 177 

Intangible  property  paid  for  in  bonds  not  considered  as  paid  for  in  cash  or 

tangible  property 104 

Surplus  or  undivided  profits  invested  in  tax-free  bonds 1-16 

Tangible  and  intangible  property;  bonds  issued  for  mixed  aggregates  of . . .  140 

Tangible  property;  bonds  construed  to  be 10-1 

Books;  defective  or  poorly  kept;  bearing  on  invested  capital 110 

Adjustment  of  in  connection  with  sur2>lus '  '■-' 

Books  of  account;  individuals 1  ('(' 

Not  kept If'' 

Bon'owed  money  and  other  property  in  relation  to  invested  capital 99 

Brokers;  nominal  capital ' ' -^ 

4] 


42  INDEX. 

Business  defined.     (5ec  "Trade  or  business.")  Paragraph. 

Invested  capital:  Business  which  will  be  deemed  not  to  have  nominal 

capital 174 

Nominal  capital :  Businesses  involving  personal  service 170 

Capital  invested.     {See  "Invested  capital.") 

No  invested  capital.     {See  "Nominal  capital.") 
Nominal  capital.     {See  "Nominal  capital.") 

Capital  of  considerable  amount  does  not  preclude  nominal  capital 172 

Capital  versus  " invested  capital" 112, 172, 174 

Capitalization,  small  or  nominal ;  relation  to  invested  capital 174 

Change  of  ownership  since  Jan.  2,  1913 42, 106 

Change  of  ownership  since  Mar.  3,  1917 ;  invested  capital ^ 107 

Citizens  and  residents.     {See  "  Individuals.") 

Claim  for  abatement  when  making  return  in  cases  of  prewar  income  being 

undeterminable  satisfactorily ;  low  or  none 50 

Class  A  income 22 

Rate  of  tax 26 

Class  B  income 23 

Rate  of  tax 27 

Classification  of  net  income  subject  to  tax 21 

Commission  merchants  versus  agents  and  brokers  in  connection  with  nominal 

and  invested  capital 173 

Compensation.     {See  "Salaries.") 

Computation  of  deduction  (see  also  "Deduction:  computation  of") 38 

Computation  of  invested  capital ;  rule  {see  also  "  Invested  capital ") 116 

Computation  of  tax.     (See  "Tax:  computation  of.") 

Consolidated  return.     (5ee  "Returns.") 

Consolidations  since  Jan.  2, 1913 42, 106 

Consolidations  since  Mar.  3,  1917 ;  invested  capital 107 

Constructive  capital  for  application  of  rates 33 

Copartnerships.     (See  "Partnerships.") 

Copyrights  paid  in  for  stock  or  shares:  valuation  of 136 

Correction  of  annual  balance  sheet 118, 119 

Mixed  tangibles,  intangibles,  patents,  and  copyrights 140 

Corporations  defined 2 

Corporations: 

Affiliated  corporations 183, 185 

Balance  sheet  as  of  last  day  of  taxable  year  to  be  submitted 131 

Corrections  required 117 

Invested  capital  determined  on  basis  of  balance  sheet  as  corrected  . . .  129 

Business  defined 7 

All  trades  or  businesses  considered  as  one 24 

Consolidated  since  January  2,  1913 42, 106 

Consolidations  since  March  3,  1917 , 107 

Deduction,  computation  of 38 

Exempt  corporations „ ,,. 18 

Fiscal  year 5 

Invested  capital  not  satisfactorily  determinable 55 

Less  than  12  months'  period 37 

Partially  within  1916 36 

Foreign,  return  and  tax  liability 12 

Holding  companies 183, 185 

Income  taxable,  classification 21 

Invested  capital 93 

Rule  for  computing  (see  also  "  Invested  capital") 116 


INDEX.  43 


« 


Corporations — Continued.  Paragraph. 

Investment  of  surplus  in  securities,  tax-free  and  otherwise 146 

Net  income — • 

Prewar  period 65 

Taxable  year - 64 

Nominal  capital.     {See  "Nominal  capital.") 

Parent  corporations 183, 185 

Prewar  income — 

How  determined 65 

Not  satisfactorily  determinable,  low  or  none 43 

Reorganizations  subsequent  to  January  2,  1913 42 

Invested  capital  for  prewar  period 106 

Reorganizations  subsequent  to  March  3.  1917 - , 107 

Return 178 

Liability  to  make 11 

Parent,  holding,  and  affiliated  companies 183, 185 

Subsidiaries 183, 185 

Specific  deduction 26 

Subsidiaries 183, 185 

Surplus.     {See  "  Surplus  in  relation  to  invested  capital."') 
Tax- 
Assessment  and  collection  of •  - 186 

Liability  to  pay 11 

Parent,  subsidiary,  and  affiliated  companies 183, 185 

Rates " 26,27 

Taxable  year - 5 

Trade  or  business  defined 7 

All  trades  or  lousinesses  considered  as  one 24 

Undivided  profits.     (See    "Undivided    profits    in    relation    to    invested 
capital.") 

Corrections  required  on  annual  balance  sheet  of  corporations  and  paitnerships . .  117 

Invested  capital  determined  on  liasis  of  balance  sheet  as  corrected 129 

Current  liabilities  in  relation  to  invested  capital 99 

Deduction;  computation  of 38 

Exceeding  15  per  cent  of  capital 30 

In  case  of  invested  capital  satisfactorily  determinable 38 

Citizen  or  resident  individuals 40 

More  than  one  trade  or  business 168 

Domestic    corporations 39 

Domestic   partnerships 40 

Foreign  corporations 41 

Foreign  partiierships 41 

Nonresident  aliens 41 

More  than  one  trade  or  business 168 

In  case  of  invested  capital  not  sati8fa<:torily  determinable 5 

Prewar  period  income  being  undeterminable  satisfactorily;  low;  or  none. .  43 

Reorganizations  subsequent  to  January  2,  1913 42 

Deduction,  specific: 

Citizens  or  residents 26,  40 

Domestic    corporations 2G,  39 

Domestic   partnerships 2b,  40 

Foreign  corporations;  none ""^ 

Foreign  partnerships;  none 23 

Nonresident  aliens;  none '^^ 


-14  INDEX. 

.    Paragrap»J. 
Definitions 1 

Assets  and  liabilities  in  connection  ^Yith  invested  capital  of  individuals 169 

Corporal  ion 2 

Dividend 10 

' '  Domestic  " 3 

• '  Foreign  " 3 

Intangible  property ' 103 

Money  or  other  property  borrowed 100 

Nominal  capital 170,  174 

'  ■  Prewar  period " ' 6 

Tangilile  property 104 

Taxable    year 5 

"Trade"  or  "business" — 

Corporations  and  partnerships 7 

Individuals 8 

"United   States" 4 

Depletion  in  relation  to  invested  capital 93 

Adjustment  of,  in  connection  with  surplus 149, 155 

Correction  necessary  on  annual  balance  sheet 127 

Depreciation  in  relation  to  invested  capital 93, 115 

Adjustment  of,  in  connection  with  surplus 149, 155 

Correction  on  annual  balance  sheet 127 

Development  of  good  will,  trade-marks,  etc.,  charged  to  current  expense;  no 

readjustment  permitted 152, 155 

Devises;  value  of,  is  exempt  from  tax 58 

Distributive  interests  of  partnerships  not  taxable  to  members  of  partnerships. .         91 

Dividend  defined 10 

Dividends  deductible: 

Individuals 81 

Corporations 64,  68 

Partnerships 70,  72 

Dividends  received  from  foreign  corporation  which  is  subject  to  income  tax . .  62,  82, 102 

Domestic  corporation  defined  {see  also  "Corporations") 3 

Equipment  originally  charged  as  expense;  readjustment  of  surplus  account. . .       151 

Estimated  capital  invested 33 

Examples  of  tax  computations.     (See  ' "  Illustrations. ' ') 

Exceptional  cases;  invested  capital 109 

Exceptional  profits  because  of  the  war;  bearing  on  invested  capital 175 

Exempt  from  tax  liability I7 

Exempt  income 57 

Exemption;  specific.     (See  "Deduction;  specific") 

Expense  involved  in  securing  data  for  computation  of  invested  capital  by  for- 
eign taxpayers  unreasonable  in  view  of  amount  of  tax HI 

Expenses  in  relation  to  invested  capital 93 

Adjustment  of  book  records  in  connection  with  surplus 149 

Fees.     (S^e  "Salaries.") 
Fiscal  year: 

First  return  for  less  than  12  months '  period 37 

Invested  capital  not  satisfactorily  determinable 35,  55 

Partially  falling  witliin  1916 36 

Relation  to  taxable  year 5 

Fixtures  originally  charged  as  e.xpense;  readjustment  of  surplus  account 151 

Foreign  corporation  stock  in  relation  to  invested  capital 102, 129 


INDEX.  45 

Foreign  corporations:  Paragraph. 

Deduction;  computation  of .......>... ,.^^^....^ 61 

Definition  of 3 

Income  from  sources  witliin  tlie  United  States  taxable 61 

Invested  capital  of;  specifically 105,  111 

Return 178 

Liability  to  make 12 

Specific  deduction ;  none 26 

Tax;  assessment  and  collection  of 186 

Liability  to  pay 12 

Foreign  dividends -..- 62.82.102 

Foreign  partnership: 

Deduction;  computation  of 41 

Income  from  sources  mtliin  the  United  States  taxable 61 

Invested  capital  of;  specifically 105.  Ill 

Return 178 

Liability  to  make - 14 

Salaries  of  members 75 

Specific  deduction 26 

Tax;  assessment  and  collection  of 186 

Liability  to  pay 14 

Fi-ancliises.     (See  also  "Intangible  property. ") 103 

Furniture  originally  charged  as  expense;  readjustment  of  surplus  account 151 

Gifts  made;  deductibi lity  of  by  individuals 84 

Gifts  of  tangible  property ;  value  of  may  be  included  as  surplus 146 

Gifts;  value  of,  is  exempt  from  tax 58 

Qood  will  (see  "Intangible  property ") . . ._. 103, 124, 152 

Government  bonds  in  relation  to  in  vested  capital 98, 129, 146 

Government  bonds;  interest  from: 

Issued  prior  to  September  24,  1917,  is  exempt  from  tax 58 

Issued  subsequent  to  September  24,  1917,  taxability  of: 

Corporations 64 

Partnerships 69 

Hawaii  considered  as  domestic 3 

Hawaii  considered  part  of  United  States 4 

Holding  companies 183,  185 

Illustrations  in  computation  of  tax: 

Corporations 28 

When  deductions  exceed  15  per  cent  of  invested  capital 31 

Individuals;  one  or  more  trades  or  businesses  with  invested  capital  with 

salary  in  addition 83,  89 

Individuals  and  partnerships;  trade  or  business  with  invested  capital 29 

When  deduction  exceeds  15  per  cent  of  invested  capital 32 

Income  disproportionate  to  invested  capital 113 

Income  during  prewar  period: 
Uow  determined — , 

Corporations .' 65 

Individuals 85 

Partnershif)3 72 

Not  satisfactorily  determinible;  low;  or  none 43 

Return  of,  not  reqtiii ed  v/licn 178 

Income  exempt 57 

Income  for  taxable  year,  how  determined : 

Corporations ('4 

Individuals 71),  :,0 

Partnerships -  -         69 


46  INDEX. 

Paragraph. 

Income  subject  to  tax,  genoi-allj^ 21 

Class  A :  No  iu vested  capital  or  nominal  capital  merely 22 

Class  B :  Invested  capital 23 

Indebtedness,  bonded,  versus  capitalization;  bearing  on  invested  capital 177 

Indebtedness,  evidences  of  construed  to  be  tangil)le  property 104 

Indebtedness  in  relation  to  invested  capital 99 

Adjustment  of  annual  balance  sheet 122 

Individuals: 

Accounting  records 166 

Books  not  kept 167 

Books  of  account 166 

Not  kept 167 

Change  of  ownership  of  business 42^  107 

Deduction;  computation  of 40 

Exempt  to  extent  engaged  in  certain  businesses  or  occupations 20.  GO 

Gifts  made  by;  deductibility  of 84 

Government  bonds;  interest  on 9,58,82 

Income  taxable — 

Classification  of .^..^^ 21 

How  determined  when  there  is  invested  capital 80 

How  determined  when  there  is  no  invested  capital  or  nominal  capital 

merely i 79 

Intangible  property;  valuation  of,  in  connection  with  invested  capital 164 

Invested  capital;  how  measured 158 

Rule  for  computing 166 

Invested  capital  not  satisfactorily  determinable 51 

Returns  in  such  cases .* 56 

Investments  merely;  profits  from 9 

Isolated,  incidental  and  infrequent  transactions ._ 9 

Married  woman  may  make  separate  retiirn 182 

Nonresident  aliens.     {See  "Nonresident  aliens. ") 
Partnerships ;  members  of — 

Distributive  interests 91 

Salaries  received  from  partnership 76,  92 

Prewar  income — 

How  determined  when  there  is  invested  capital 85 

Not  satisfactorily  determinable;  low;  or  none 43 

Profits  earned  during  taxable  year  and  retained  in  trade  or  business 165 

Reorganizations  subsequent  to  Januarj?-  2,  1913 42 

Reorganizations  subsequent  to  March  3,  1917 107 

Returns ]78 

Liability  to  make 15 

Rule  for  computing  invested  capital 166 

Salaries  considered '  income  from  trade  or  business  having  n  o  invested 

capital  or  nominal  capital  merely 22,  79 

Salaries  paid  to  members  of  partnerships  by  the  firm 76,  92 

Salaries  paid  to  selves 86 

Prewar  period 90 

Salaries  paid  to  members  of  partnerships  by  the  firm 76,  92 

Salaries  paid  to  selves  by  individuals 86 

Prewar  period '. 90 

Specific  deduction 26,40 

Tangible  property;  valuation  of,  in  connection  with  invested  capital 159 


INDEX.  47 

Individuals — Continued.  .  Paragraph. 

Tax;  assessment  and  collection  of 186 

Liability  to  pay 16 

Taxable  year  for  indi\ddiials 5 

Trade  or  business: 

Defined 5 

Different  businesses  separately  taxed  according  to  classification  of 

income 25 

More  than  one  trade  or  bnsiness 1G8 

Insurance  companies;  invested  capital  of 156 

Intangible  property: 

Appreciation  in  value  of;  correction  of  annual  balance  sheet 126 

Appreciation  in  value  through  development;  relation  to  invested  capital. .  177 

Defined 103 

Development  of,  having  been  charged  aa  current  expense 152, 155 

Valuation  of,  as  iuA'ested  capital  of  an  individual 164 

Valuation  of,  when  purchased  with  cash  or  tangilile  property 144 

Correction  of  annual  balance  sheet 124 

No  adjustment  of,  on  account  of  surplus  account 152, 155 

Payment  for,  in  stock  or  bonds  not  considered  as  payment  in  cash  or 

tangible  property 104 

Valuation  of,  when  purchased  with  stock  or  shares: 

Application  of  the  20  per  cent  limitation 138 

Correction  of  annual  balance  sheet 117 

Mixed  tangibles,  intangibles,  patents,  and  copyrights 140 

Nonpar  value  stock 139 

Prior  to  March  3,  1917 137 

Interest  on  loans  to  partnership  by  mcml jers  thereof 77 

Interest  on  obligations  of  State  and  ]io]itical  subdivisions  thereof  is  exempt 

from  tax 58 

Interest  on  ol>ligations  of  United  States: 

Issued  prior  to  September  24,  1917 :  E.xempt  from  tax 58 

Issued  subsequent  to  September  24,  1917:  Taxability  of: 

Corporations 64 

Individuals 82 

Partnerships 69 

Invested  capital 93 

Accounting;  defective 110, 149, 155 

Accounting;  ultraconservative Ill 

Adjustment  of  annual  balance  sheet 117 

Agents  and  brokers;  nominal  capital 173 

Amortization 115 

Appreciation  in  value  of  capital  assets 93, 126, 177 

Tangible  property  acquired  prior  to  January  1 ,  1914 134 

Averaging  by  months 94 

Balance  sheet  required  annually  from  corporations  and  partnerships 131 

(.-orrections  necessary 117 

Invested  capital  determined  on  basis  of  balance  sheet  as  corrected 129 

lionds  in  relation  to  invested  capital 98, 101, 177 

Surplus  or  undivided  profits  invested  in 14G 

Tangible  and  intangible  property;  bonds  issued  for  mixed  aggregate  of  140 

Businesses  which  will  not  be  deemed  to  have  nominal  capital 174 

Capital  versus  invested  capital 112,  172, 174 

Capital  assets;  appreciation  in  value  of 93, 126, 177 

Tangible  property  acquired  prior  to  January  1,  1914 134 


48  INDEX. 

Invested  Capital — Cantinucd.  Paragraph. 

Ca]Mlalization  small  or  negligible;  bearing  on  invested  capital 174 

Commission  houses  and  merchants 173 

Computation  of,  rule — 

Corporations  and  partnerships 116 

Individuals 1G6 

Copyrights;  valuation  of  when  paid  for  in  stock  or  shares 136 

Correction  of  anniial  balance  sheet 118, 119 

Correction  of  annual  balance  sheet 117 

Defined  as  invested  capital  of  present  owner 93 

Depletion  of  property 93 

Adjustment  of,  in  connection  with  surplus 149, 155 

Depreciation  of  2:)roperty 93, 115 

Adjustment  of,  in  connection  with  surplus 149, 155 

Exceptional  cases 109 

Expense  involved  in  seciiring  data  for  computation  of  invested  capital  in 

case  of  foreign  taxpayers  unreasonable  in  view  of  amount  of  tax Ill 

Expenses  incurred 93 

Adjustment  of,  in  connection  with  surplus 149, 155 

Foreign  corporation  stock 102, 129 

Foreign  corporations  specifically 105,  111 

Foreign  partnerships  specifically 105,  111 

Good  will 152 

Correction  of  annual  balance  sheet 124 

Is  intangible  property 103 

Income  disproportionate  to  invested  capital 113 

Indebtedness 99 

Indi\dduals  specifically 158 

Rule  for  computing 166 

Insurance  companies 156 

Intangible  property: 

Appreciation  in  value  of,  because  of  development,  etc 12G,  177 

Correction  of  annual  balance  sheet 117 

Defined 103 

Valuation  when  paid  for  in  cash  or  tangibles ]  44 

Payment  in  stock  or  bonds  not  considered  payment  in  cash  or  tan- 
gible property 104 

Valuation  when  paid  for  in  stock  or  shares 137 

Mixed  tangibles,  intangibles,  patents,  etc 140 

Nonpar  value  stock 139 

Intangible  property ;  valuation  of  as  invested  capital  of  an  individual 164 

Items  not  allowed  to  be  included 97 

Liquidation  of  original  capital 93 

Losses  sustained 93 

Adjustment  of,  in  connection  with  surplus * 149, 155 

Mixed  aggregate  of  tangible  and  intangible  property  and  patents  and  copy- 
rights when  paid  for  in  stock  or  shares  (or  stock  or  shares  and  bonds  or 
other  obligations) 140 

Correction  of  annual  balance  sheet 118 

Money  or  other  money  borrowed  not  to  be  included 99 

The  term  defined 100 

Mutual  insurance  companies 156 

No  invested  captial  {see  "Nominal  capital"). 
Noioinal  capital  {see  "Nominal  capital"). 


INDEX.  49 

Invested  capital — Continued.  Paragraph. 

Nonpar  value  stock;  purchase  of  intangible  property  therewith. 139 

Nonresident  aliens  specifically 105,  111 

Not  satisfactorily  determinable , 33,  51, 109 

Fiscal  year  basis 35,  55 

Returns  in  .such  cases 57 

Obsolescence  of  property. , 93, 115 

Adjustment  of  in  connection  with  surplus 149, 150 

Paid  in  surplus 116.  147 

Patents  and  copjTiglits ;  valuation  of  when  paid  for  in  stock  or  shares 136 

Correction  of  annual  balance  sheet 118, 119 

Prewar  period 108 

Profits  earned  during  taxable  year  in  case  of  an  indi^'idual 165 

Profits ;  exceptional  because  of  war  conditions ;  bearing  on  invested  capital .       175 ' 
Reorganizations  subsequent  to: 

January  2,  1913 106 

March  3,  1917 ] 07 

Return  of  for  prewar  period  not  reqiured ;  when 178 

Return  of  for  taxable  year 181 

Stock  issued  or  exchanged  for  property,  returned  to  corporation  as  gift  or 

for  consideration  considerably  less  than  par 132 

Correction  of  annual  balance  sheet 121 

Stock  insurance  companies 157 

Stocks  and  bonds  in  relation  to  invested  capital 98, 101, 129, 177 

Foreign  corporation  stock 102, 129 

Surplus  or  undivided  profits  invested  in 146 

Surplus  in  relation  to  invested  capital 93, 116, 146 

Earned  during  any  prewar  year 145 

Earned  during  taxable  year 145 

Investment  in  securities,  tax-free  and  otherwise 146 

Paid-in  surplus IIC,  147 

Readjustment  of  surplus  account 149, 155 

Tangible  property  considered  as  surplus  when 147 

Tangible  property  considered  as  surplus  when 147 

Tangible  property ;  items  construed  to  be : 104 

Valuation  when  paid  for  in  stock  or  shares 134 

Correction  of  annual  balance  sheet 118 

Mixed  tangibles,  intangibles,  patents,  etc 140 

Tangible  property  valuation  of,  as  invested  capital  of  an  individual 159 

Tax-^free  securities 98, 101, 129, 177 

Surplus  or  undivided  profits  invested  in 146 

Trade  or  business  having  invested  capital  (See  "Invested  capital,  trade 
or  business  having"). 

Undivided  profits  in  relation  to  invested  capital 93,116,146 

Earned  during  any  prewar  year 145 

Earned  during  taxable  year 145 

Invested  in  securities,  tax-tree  and  otherwise 146 

Paid  in  surplus 147 

Readjustment  of  surplus  account 149, 155 

Tangible  property  considered  as  siuplus  when 147 

Invested  capital — trade  or  business  having 

Constructive  capital  for  application  of  rates  deduction,  computation  of 38 

Tax  rates 27 

Invested  capital  versus  capital 172, 174 


50  INDEX. 

Paragraph. 

Investment  of  surplus  in  securities,  tax-free  and  otherwise 146 

Investments  merely;  profits  from  two  indi viduals 9 

January  2,  1913;  reorgaiiizatious  subsequent  to 42 

1  nvested  capital  for  prewar  period 106 

January  1,  1914;  tangible  property  paid  in  for  stock  or  shares: 

Prior  to  this  date 134 

Appreciation  in  value  of  assets  allowed 134 

Subsequent  to  this  date 135 

Judges  of  United  States;  salary  of,  is  exempt  from  tax 58,  60 

Leaseholds  construed  to  be  tangible  prop3rty 104 

Life  insurance;  proceeds  are  exempt  from  UvX 58 

Limited  partnership  considered  a  corporation 2 

Loans  to  partnership  by  members  thereof;  interest  on: 

Taxable  year 77 

Prewar  period 78 

Losses  in  connection  with  invested  capital 93 

Adjustment  of  books  in  connection  with  surplus ■  149 

March  3,  1917;  intangible  property  purchased  with  stock  or  shares  prior  to 137 

Application  of  the  20  per  cent  limitation 138 

Non-par- value  stock 139 

March  3,  1917;  mixed  property  (tangible  or  intangible)  purchased  with  stock  or 

shares 140 

March  3,  1917 ;  reorganizations  subsequent  to ;  invested  capital 107 

Married  woman  may  make  separate  return 182 

Mixed  aggregate  of  tangibles,  intangibles,  patents,  and  copyrights  purchased 
with  or  paid  for  in  stock  or  shares  (or  stock  or  shares  and  bonds  or  other  obli- 
gations) ;  valuation  of 140 

Correction  of  annual  balance  sheet 118 

Money  or  other  propertj^  borrowed  not  to  be  included  in  invested  capital 99 

The  term  defined. 100 

Mutual  insurance  companies,  invested  capital  of 156 

Is'et  income  subject  to  tax;  classification  of 21 

Class  A:  JSo  invested  capital  or  nominal  capital  merely 22 

Class  B:  Invested  capital 23 

Net  income  subject  to  tax;    how  determined: 

Corporations 64 

Individuals 79,  80 

Nonresident  aliens 79,  80 

Partnerships G9 

Nominal  or  no  invested  capital 170 

Agents  and  brokers 173 

Businesses  which  will  not  be  deemed  to  have  nominal  capital 174 

Commission  houses  and  merchants 173 

Large  capital  does  not  preclude  nominal  invested  capital 172 

Personal  service,  occupation,  profession,  trade,  and  business 170 

Salaries,  wages,  fees,  etc.,  of  individuals 22,  79 

Tax  rates 26 

Nonpar  value  stock  in  connection  with  purchase  of  intangible  property  with 

stock 139 

Nonresident  aliens  (see  "  Individuals"  forgeneral  provisions): 

Deduction ;  computation  of 41 

Income  from  sources  within  the  United  States  taxable 61,  79,  80 

Income  of,  subject  to  tax ;  how  determined 79,  80 

Invested  capital  of,  specifically 105 


INDEX.  51 

Nonresident  aliens — Continued.  Paragraph. 

Keturn >. , 178 

Liability  to  make 16 

Salaries  paid  to  selves 87 

Specific  deduction ;  none 36 

Tax;  assessment  and  collection  of 186 

Liability  to  pay 16 

Notes  consti'ued  to  be  tangible  property 104 

Obsolescence  of  property  in  relation  to  invested  capital 93, 115 

Correction  of  annual  balance  sheet 127 

Adjustment  of  in  connection  with,  surplus 149 

Occupations  involving  personal  service 170 

Organizations  subsequent  to  January  2,  1913,  .which  are  substantially  a  con- 
tinuation of  a  former  business 42 

Invested  capital  for  prewar  period 106 

Correction  of  annual  balance  sheet 125 

Original  capita! ,  liquidation  of 93 

Ownei'ship  of  property,  income  arising  merely  because  of 9 

Paid-in  surplus 116, 147 

Parent  corporations , 183, 185 

Partial  year,  retiu'n  and  pajonent  of  tax  for 37 

Partnerships: 

Balance  sheet  required  annually  on  last  day  of  taxable  year 131 

Corrections  required 117 

Invested  capital  determined  on  basis  of  balance  sheet  as  corrected 129 

Deduction,  computation  of 40 

Distributive  interests  not  taxable  to  members 91 

Dividends  deductible 70,  72 

Exempt  partnerships 19 

Fiscal  year. 5 

Less  than  12  months'  period 37 

Partially  within  1916 36 

Foreign  partnerships ;  return  and  tax  liability 14 

Si>ecific  deduction;  none. 26 

Income  taxable: 

Classification  of 21 

How  detennined  for  prewar  period 72 

How  detennined  for  taxable  year 69 

Interest  on  loans  by  members  to  the  firm : 77 

Invested  capital  not  satisfactorily  determinable 51 

Fiscal  year  basis 55 

Returns  in  such  cases 56 

Invested  capital 93 

Rule  for  computing  (see  aZso  "Invested  capital") 116 

Investment  of  surplus  in  securities,  tax-free  and  otherwise 146 

Limited  partnerships  considered  aa  corporations  q.v 2 

Nominal  capital.     (6'ce  "Nominal  capital.") 
ftfewar  income — 

How  determined V2 

Not  satisfactorily  determinable;  low;  or  none 43 

Salaries  of,  and  interest  paid  to,  members 78 

Reorganization.s  subsequent  to — 

January  2,  1913 106 

March  3,  1917 107 


52  I^'DEX. 

Par tn  ei-sh  i  ps-  Cont  i  liued .  Paragraph. 

Returns 178 

T.ialility  to  make 13 

Salaries  of  mombers — 

Ded  uctible  by  firm 71,  73 

Prewar  period 78 

Taxable  to  members 70,  92 

Specific  deduction 2G,  40 

Tax,  assessment  and  collection  of 186 

Liability  to  pay 13 

Taxable  year 5 

Income  of,  how  determined 69 

Trade  or  business — 

All  trades  or  businesses  considered  as  one 24 

Defined 7 

Patents  and  copyrights  paid  in  for  stock  or  shares;  valuation  of 136 

Correction  of  annual  balance  sheet 118,  119 

Mixed  tangibles,  intangililes,  patents,  and  copyrights 140 

Patterns  origiTially  charged  to  expense;  readjustment  of  surplus  account.   151,  153,  155 
Personal   service  occupations,    professions,    trades,   and   businesses,    nominal 

capital 170 

Plant  expenditures  charged  originally  to  expense';  readjustment  of  surplus 

account -> 151 

President  of  United  States,  salary  of,  is  exempt  from  tax 58,  60 

Prewar  period : 

Defined 6 

Income  of,  how  determined — 

Corporations 65 

Individ  uals  when  there  is  invested  capital 85 

Salaries  paid  to  selves 90 

Partnerships 72 

Salaries  of,  and  interest  paid  to,  members 78,  91 

Income  not  determinaljle  satisfactorily ;  low ;  or  none  during  prewar  period .  145 

Invested  capital,  manner  of  determining 108 

Surplus  earned  during  any  prewar  year 145 

Professions;  nominal  capital 170 

Profits  earned  during  taxable  year  and  retained  in  business  in  case  of  individ- 
uals {see  "Undivided  profits"  for  corporaticns  and  partnerships) 165 

Profits,  exceptional  becau^  of  war  conditions;  bearing'on  invested  capital 175 

Promissory  notes  construed  to  be  tangible  property 104 

Reorganizations  since  January  2,  1913 42 

Correction  of  annual  balance  sheet 125 

Invested  capital  for  prewar  period 108 

Reorganization  since  March  3,  1917 ;  invested  capital 107 

Correction  of  annual  balance  sheet 125 

Returns 178 

Consolidated  return 185 

Fiscal  year -         5 

Less  than  the  regular  12  months'  period 37 

Partially  falling  within  1918 38 

Holding  companies 183, 185 

Invested  capital  not  satisfactorily  determinable;  returns  in  such  cases 58 

Liability  to  make  return — 

Citizens  and  residents 15 

Domestic  corporations 11 


I 

t 


I 


INDEX.  53 

Returns — Continued. 

Liability  to  make  return — Continued.  Paragraph. 

Domestic  partnerships 13 

Foreign  corporations 12 

Foreign  partnerships - 14 

INronresident  aliens '. IG 

Married  woman  may  make  separate  return 182 

Parent  corporations 183, 185 

Period  covered 5,  37 

Statement  of  proposed  additions  to  surphis  on  account  of  readjustments- 

to  be  inclnde*d  on  return 154 

Subsidiaries 183, 185 

Taxable  year 5 

Fiscal  year  partially  falling  within  1916 36 

Less  than  the  regular  12  months'*  period 37 

Rule  for  computing  invested  capital: 

fbrporations  and  partnerships =    IIG 

Individuals 166 

Salaries  considered  income  from  trade  or  business  ha^dng  no  invested  capital 

or  nominal  capital  only 22,  79 

Exempt  salaries 58,  60 

Minimum  amounts  received  as  salaries  taxable 26,  40 

Partnerships;  salaries  of  members  of 78, 92 

Self,  salary  paid  to 88 

United  States,  State,  etc.,  employees f;0 

Salaries  pitid  members  of  partnership  by  the  firm : 

Dedirctible  by  hrm 71,  73 

ForeigH  partnerships • 75 

Prewar  period 78 

Taxable  to  members 76,  92 

Salary  paid  to  self 86 

Nonresident  aliens 87 

Prewar  period 90 

Securities  in  relation  to  invested  capital 9S,  101, 129, 177 

Foreign  corporati-on  stock 102, 129 

Surphis  or  undivided  profits  invested  in  securities,  tax-free  and  otherwise.      146 

Tangible  property;  securities  construed  to  be 104 

Services;  occuparions,  professions,  trades,  businesses,  involving  personal  serv- 
ice ;  nomrnal  capita? 170 

Specific  exemption  or  deduction.     {Sec  "Deduction,  specific") 

State,  etc.,  employees;  salaries  of,  are  exempt  from  tax 60 

State  obHgations;  interest  on,  is  exempt  from  tax  (see  a?so"  Tax-free  securities")        58 
Stock  or  shares  issued  or  exchanged  for  property: 

Correction  of  annual  balance  sheet  in  connection  Tvith 11 71f 

Intangible  property,  valuation  of. 137 

Application,  of  20  per  cent  limitation 138 

Nonpar  value  stock , '■ 1 39 

Payment  made  in  stock  not  considered  as  payment  made  in  cash  or 

tangible  property '  t)'l 

Mixed  tangibles,  intangibles,  patents,  and  copyrights HO 

Patentsaml  copj-rights;  valuation  of.  , l'^6 

Stock  returned  to  corporation  as  gift  or  for  consideratien  considerably  less 

than  par I  "^ 

Tangible  property;  valuatron  of i  34 

Stock  insurance  companies;  invested  capital  of 157 


54  INDEX. 

raragraph. 

Stock  without  par  value;  purchase  of  intangible  property  therewith 139 

Stocks  and  bonds  in  relation  to  invested  capital 98, 101, 129, 177 

Foreign  corporation  stock 102, 129 

Government  bonds 98, 146 

Surplus  or  undivided  profits  invested  in  securities,  tax-free  and  otherwise.  98, 146 

Tangible  property;  stocks  and  bonds  construed  to  be 104 

Subsidiaries 183, 185 

Subtractions  on  annual  balance  sheet  in  computing  "invested  capital " 117 

Surplus  in  relation  to  invested  capital 93, 116, 146 

Earned  during  taxable  year 145 

Earned  during  any  prewar  year 145 

Government  bonds;  investments  in 98, 146 

Individuals;  profits  earned  during  taxable  year  and  retained  in  business. .      164 

Invested  in  tax-free  and  other  securities 98, 146 

Paid-in  surplus 116, 147 

Readjustment  of  surplus  account 149, 155 

Tangible  property — 

Cost  of,  originally  charged  to  expense;  readjustment  of  surplus  ac- 
count  151, 153, 155 

When  to  be  included  as  surplus 147 

Tangible  property: 

Appreciation  in  value  of;  correction  of  annual  balance  sheet 126 

Cost  of,  originally  charged  to  expense;  readjustment  of  surplus  account 151, 

153, 155 

Intangibles  purchased  with 144 

Items  construed  to  be 104 

Purchased  for  nominal  sum;  excess  of  value  over  purchase  price  may  be 

included  as  surplus 147 

Surplus;  when  tangible  property  may  be  included  as 147 

Valuation  of,  as  invested  capital  of  individual 159 

Valuation  of,  when  purchased  with  stock  or  shares — 

Correction  of  annual  balance  sheet .• . . .    118ff 

Mixed  aggregate  of  tangibles,  intangibles,  patents,  and  copyrights 140 

Prior  to  January  1,  1914 134 

Subsequent  to  January  1,  1914 135 

Tax ;  assessment  and  collection  of 186 

Parent,  subsidiary,  and  affiliated  companies 183, 185 

Tax;  computation  of 21 

Constructive  capital  invested 33 

Deduction  exceeding  15  per  cent  of  capital  invested 30 

Fiscal  year  partially  within  1916 36 

Illustrations — 

Corporations 28 

When  deduction  exceeds  15  per  cent  of  invested  capital 31 

Indi^'idua]s  and  partnerships;  trade  or  business  with  invested  capital.        29 

When  deduction  exceeds  15  per  cent  of  invested  capital 32 

Indi^-iduaIs;  one  or  more  trades  or  businesses  with  invested  capital 

with  salar>'  in  addition 83,  89 

In  case  of  invested  capital 27 

In  case  of  no  invested  capital  or  nominal  capital  merely 26 

Less  than  12  months'  period 37 

Tax-free  securities 98, 101, 129, 177 

Surplus  or  undivided  profits  invested  in 146 


INDEX.  55 

Paragraph. 

Tax  liability ....*. , 11 

Citizeus  and  residents 15 

Corporations 11 

Foreign  corporations 12 

Exemptions 17 

Nonresident  aliens , 16 

Partnerships 13 

Foreign  partnerships 14 

Tax  rates: 

In  case  of  invested  capital 27 

In  case  of  no  invested  capital  or  nominal  capital  merely : 26 

Taxable  year 5 

Fiscal  year  partially  falling  within  1916 36 

First  return  for  less  than  12  months'  period 37 

Income  of,  determined  how: 

Individuals 79,  80 

Corporations 6-1 

Partnerships. 09 

Surplus  earned  during 145 

Profits  in  case  of  individual 165 

Taxes  paid  Avithin  calendar  years  1911,  1912,  and  1913  by  corporations  to  be 

included  in  taxable  income 05,67 

Tools  originally  charged  as  expense;  readjustment  of  surplus  account 151 

Trade  brands  (see  also  "Intangible  property  ") 103 

Trade-marks  are  intangible  property  (see  also  "Intangible  property  ") 103 

Trade  or  business  defined : 

Corporations  and  partnerships 7 

A!l  trades  or  businesses  con.sidered  as  one 24 

Individuals 8 

Different  businesses  separately  taxed  according  to  classification  of 

income 25 

Distributive  interests  of  members  of  partnersliips 91 

More  than  one  trade  or  business 168 

Salaries,  wages,  compensation,  etc 22,  79,  88 

Members  of  partnerships 70,  92 

Invested  capital  business  in  general 1 79 

Nominal  capital  business  in  general 174 

Personal  service;  nominal  capital 170 

Twenty  per  cent  limitation  on  intangible  property  purchased  Avilh  stock  or 

shares 138 

Undivided  profits  in  relation  to  invested  capital  {see  "Surplus  in  relation  to 

invested  capital  ") 93, 116, 146 

United  States  bonds  in  relation  to  invested  capital 98, 146 

United  States  bonds  interest  on.     (See  "Government  bonds.  ") 

"United  States  "  defined 4 

Valuation  of  intangible  assets  purchased  with  cash  or  tangible  property 144 

Appreciation  in  value  of,  through  development;  bearing  on  invested  capital  177 

Correction  of  annual  balance  sheet 124 

Valuation  of  property  paid  for  in  stock  or  shares: 

CoiTection  of  annual  balance  sheet 117ff 

Intangibles 137 

Appreciation  through  development;  bearing  on  invested  capital 177 

Stock  wdthout  par  value 139 


56  INDEX. 

Valuation  of  property  paid  for  in  stocks  or  shares — Continued.  Paragi 

Mixed  tangibles,  intangibles,  patents  and  copyrights .•. 

I'atents  and  cojiyrights 136, 

Stock  returned  to  corporation  as  gift  or  for  consideration  considerably  below 

par 

Tangible 

War,  exceptional  profits:  Bearing  on  invested  capital 

War,  inability  to  recognize  amortization,  obsolescence,  or  exceptional  deprecia- 
tion becaiise  of 

Vear,  taxable 

Fiscal  year  partially  falling  within  1916 

Return  for  less  than  12  months'  period 

o 


LAW  LIBRARY 
fVERSITY  OF  GAUP^RMA 
LOS  ANGBbES 


Manufoctured  by 
^     ^YLORD  BROS,  tnt 
I        Syracuse,  N.Y. 
I         Stockton,  CoNf. 


fftCILlTV 


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